What are the different home loan types?

What you’ll learn

• What is a variable interest home loan
• What is variable rate with offset home loan
• What is a fixed rate home loan
• How does a split loan work?
• Other types of loans

 

What is a variable rate home loan

A variable rate home loan is the most common home loan in Australia. The interest rate can go up and down with the market. And as the interest rate changes, so too do your repayments. If the interest rates rise, your repayments will go up. If interest rates fall, your repayments will go down. If interest rates go down, you can also choose to keep your repayments the same. Doing this will help pay off your loan faster.

Benefits of a variable rate home loan

Loans like the Westpac Flexi First Option are designed to give you flexibility. Not only can your repayments go down when interest rates go down, but there are often other advantages. With most variable home loans you can:

• Make unlimited extra repayments - each extra repayment helps reduce the interest you pay and the time it takes to pay off your loan.
• Redraw your home loan - a redraw lets you access funds you might have already repaid, up to your current limit.
• Apply to top up your loan - a top-up lets you increase your current loan to access extra funds. It can be faster and easier than applying for a new loan.

Trade-offs to consider

• Repayments can change - when interest rates rise, your repayments go up, which can impact your household budget.

What is a variable rate with offset home loan

This loan is like a variable rate home loan but also has an offset account. You can put savings and other funds in this account, and it will reduce the home loan amount you need to pay interest on.

Benefits of a variable rate with offset home loan

Westpac Rocket Repay is an example of a variable rate loan with offset. It's designed to give you flexibility and efficiency.

• Pay your loan off faster - the more money you keep in your offset, the less your interest charges will be, which could potentially help you pay your loan balance down quicker.

Trade-offs to consider

• You don't earn interest on your savings - unlike with some savings accounts, funds you keep in an offset won’t earn interest over time. Instead, they’ll work to reduce interest charges on your loan.
• The interest rate might be higher - your variable interest rate might be higher than a home loan without one.

What is a fixed rate home loan

A fixed rate home loan is another popular type of home loan. Instead of your interest rates and repayments changing with the market, you lock-in an interest rate for a set amount of time. This period is called a loan term and is generally one to five years. After your loan term, you can fix it again at the interest rates available at the time, or let it revert to the variable interest rate.

Benefits of a fixed rate home loan

Home loans like the Westpac Fixed Option are designed to give you certainty. Each repayment is the same during your fixed loan term, and that can make life easier in a variety of ways:

• Make budgeting easy - you know exactly what you need to repay so budgeting is simpler.
• Repayments won’t change - if interest rates rise, your repayments will still stay the same.

Trade-offs to consider

During a fixed loan term, there are some potential downsides to think about, including:

• Repayments don't go down - when the market interest rates go down, your repayments will not drop with them.
• Limited extra repayments - you'll likely be limited by how much extra you can repay on your home loan.
• Break costs¹ - if you want to end the loan before the fixed term is up, you will probably have to pay break costs. These break fees and costs can be triggered by:
  o   refinancing (switching your home loan to another bank)
  o   paying off your loan faster than your loan allows
  o   selling without 'porting' the loan (taking your home loan with you to another property). You can usually take your loan with you even if the property securing it changes, such as when you move.

Your lender can explain more about what they consider 'breaking your fixed loan'.

How a split home loan works

A split home loan is part variable loan, part fixed rate loan. It gives you the benefits and downsides of both.
 

When you get a split home loan, you fix part of the loan and leave the rest variable. The fixed portion gives you a level of certainty, while the variable part lets you benefit from interest rate drops, and you can make extra repayments, redraw or top-up for that portion of your loan. Estimate split repayments.

Benefits of a fixed rate home loan

The Westpac split home loan option is designed to give you a balance of benefits, including:

• Greater repayment consistency - the fixed portion of your loan will give your repayments some stability, even when interest rates rise and fall.
• Drops in interest rate - if interest rates fall, your repayments on the variable portion of the loan will also fall.
• Make extra repayments - you can make extra repayments on the variable portion.
• Add an offset account - reduce the amount of your variable loan that you pay interest on with an offset account on that portion.

Trade-offs to consider

• Rises in interest rates - if interest rates rise, your repayments on the variable portion of your loan will also go up.
• Limits on extra repayments - your ability to make extra repayments will be limited on the fixed portion of the loan.
• Break costs - there will be costs involved if you exit the fixed portion early.

Other types of home loans

While variable, fixed and split home loans are the most common home loans, there are others you may consider.

• Construction loan option - a construction loan option is designed to fund building or major renovation work. You normally have the option for or variable or a fixed interest rate, and it allows you to draw down the loan in stages with the work. This allows you to pay trades and suppliers for what they have done, while not taking on all the debt until the work is complete.
• Bridging Loan - a bridging loan is designed for people who have a home, but want to buy a new house before they sell their current one. It's a short-term loan that is closed when your existing property is sold. The size of the bridging loan is calculated on the available useable equity in your current home.

To sum up

• The right loan for you depends on your goals and your situation.
• A variable interest home loan offers the flexibility to make unlimited extra repayments.
• A variable rate home loan with offset account could also help you reduce interest charges.
• A fixed interest home loan offers certainty over your rate and repayments.
• A split loan offers a balance of benefits.
• A construction loan option might help when building or conducting major renovations.
• A bridging loan can help when you want to buy a new home before you sell your old one.
• You can compare Westpac home loan types here.