Standard Variable Rate Loans
With a variable rate loan the interest charged on your loan can go up or down at any time. Usually changes to the interest rate on your loan are in line with movements in official interest rates set by the Reserve Bank.
The main benefit of a variable rate loan is its total flexibility, such as a redraw facility. And of course, if rates go down you save on interest. Typically, it's easy to switch from a variable rate loan to another type without paying any fee.
The down side is obviously that when interest rates go up, so does the rate on your loan. You have to decide what you think interest rates will do and whether you can budget for an increase.
'Basic' Variable Rate Loans
Many lenders now offer 'Basic' variable rate loans, which are 'no-frills' versions of the standard variable rate loan. These loans have interest rates, which are invariably lower than standard variable rates, but do not offer the same flexibility.
Introductory Rate or 'Honeymoon' Rate Loans
These are loans that many lenders offer to first time borrowers, offering a rate below the standard variable rate, usually for one year. These are designed to attract new customers and are usually not available to current home loan customers of the lender. Loans such as these typically revert to the standard variable rate after one year, in some cases attempting to lock in the standard variable rate for a number of years.
This option allows for lower repayments in the first year of the loan. However, some lenders insist that the instalments on your introductory rate loan be paid back at the standard variable rate. Be sure you do your sums on what the rate will be after the first year and the cost of changing to a different type of loan should you wish to change lender or loan type.
Split Rate Loans
Some lenders offer a combination of fixed and variable rate, sometimes known as a 'Split Rate' loan. These let you take a part of your loan at a fixed rate, with the balance as a variable rate – a bit like having a bet 'both ways' when trying to pick what interest rates will do.
Capped Rate Loans
Sometimes you'll see "Capped rate" loans advertised. These are fixed rate loans that can't go up past a set rate, but can go down if interest rates fall. Usually they're only offered for a term of one year.
Ways To Reduce The Term on Your Loan
- Pay your loan fortnightly or weekly instead of monthly. This schedule can significantly reduce the amount you end up paying back on your loan.
- Pay more than your minimum repayment each month. Even a few dollars a month extra can make a considerable difference over the years. If you are paying the minimum and the interest rate drops, leave your repayment at the same level and you won't even notice the difference.
- Make lump sum payments. If you have some extra cash, put it straight on your loan. (Many loans will allow you to redraw it if you need it further down the track.)
- An offset account allows the interest calculated on the funds in your savings account to reduce the interest payable on your home loan.