If you are a first time buyer researching home loans can be an overwhelming experience - with literally hundreds of options on the Australian market with different interest rates and features. Getting the lowest interest rate should be a priority, but you also need to choose a home loan that suits your circumstances. Read our Q&A explainer for an overview of the different types of mortgage products available, with a focus on understanding how home loan features work and what the different mortgage products are used for.
Let’s start by understanding the different types of home loans or mortgages available in Australia.
When it comes to a home loan you have the option of applying for a fixed rate, variable rate or a combination of both - a split rate. Each has its unique set of features, so you need to choose based on your needs and financial circumstances.
With a variable interest loan, the interest rate on your loan can go up or down, in line with market interest rates. This type of loan often has features like extra repayments, a redraw facility or an offset account - which makes them a popular choice. An offset account allows you to put your savings against the loan amount, which reduces the overall interest you pay. Interest rates tend to be lower for variable rate home loans, compared to a fixed rate home loan.
Pros of a variable rate home loan include:
On the downside, you don’t have certainty of knowing how much your repayments will be as interest rates could change in the future.
A fixed rate loan is when the interest rate on your loan is locked in for a set period - normally 1, 2, 3 or 5 years. After this period, the interest rate will revert to the standard variable rate or another variable rate negotiated with your lender unless you organise to refinance or refix.
Pros of this type of loan include:
The negatives of fixed rate loans include limited flexibility, with no option for an offset account or a redraw facility. You may also incur fees if you want to exit this type of loan.
A split loan is a combination of a variable and fixed - so you have the best of both worlds. This could be useful as you can make extra repayments on the variable portion, or offset to repay your loan faster - while you get some rate certainty on the fixed portion. Yard offers loans with up to 5 splits.
Learn more: Fixed rate vs variable rate home loans
You also need to understand the two main ways interest rates are charged on a mortgage.
You also have the option of choosing how you repay your loan. There are two types of home loan repayments:
Principal and interest is when part of your monthly repayments pay down a portion of the loan amount (called the principal) and the interest charges on the loan.
The benefits of principal and interest repayments include being able to repay your home loan sooner, and the fact you'll pay less interest over the life of your home loan because you're also paying down the loan amount.
Interest only loans - where your weekly/fortnightly/monthly repayments only pay off the interest on the loan - not the loan and principal. This type of loan usually has a time limit after which it reverts to principal and interest.
This type of loan is more popular with investors as it has possible tax benefits if the property is being used as an investment, but it generally means you will take longer to pay it off.
It is also important you understand how interest is calculated on your home loan.
Lenders will typically calculate home loan interest daily and charge it monthly. At the end of each day, a lender will divide the remaining loan amount by 365 (some lenders will change this to 366 in leap years) and multiply that amount by your home loan rate. Then each month, when your repayment is due, they'll add all of the interest calculations together to calculate how much interest you owe for that month.
Now let’s look at some useful features you could have attached to your home loan.
Home loans typically come with a range of product features, designed to give you more flexibility managing your finances. Some of the most common and useful of these include:
If your home loan has the option of making extra repayments, this can help shorten the term of your loan, and reduce the amount of interest owed. It's as easy as making additional payments, over and above the minimum amount toward your regular scheduled repayments.
You can make unlimited additional repayments free of charge against your Yard variable loan and up to $20,000 per year free of charge against your fixed term loan. You can also redraw these for free through our online portal.
A redraw facility gives you the ability to make additional repayments toward your Yard home loan, and then withdraw these at a later date when required. Making regular repayments higher than the minimum required, or one-off additional payments, can reduce the amount of interest you pay on your home loan, and help pay off your home loan faster.
We offer unlimited free redraw on our variable rate loans. If you’ve made extra repayments on your variable rate Yard Home Loan, you can redraw these for free through our online portal.
An offset account is a transaction account that is linked to your home loan, where money can be deposited and withdrawn at any time. Having an offset account linked to your home loan allows your savings to lower the amount of interest you pay on the variable part of your home loan. Your loan principal gets reduced by the amount of money you hold in your offset account for the purpose of interest calculation.
Yard has an optional 100% Offset Facility linked to your home loan, which allows your savings to lower the amount of interest you pay on the variable part of your home loan.
When it comes time to compare home loans you also need to understand comparison rates.
If this is your first time looking at home loans you may well be wondering what the comparison rate refers to.
A comparison rate is displayed as a percentage rate, which includes the interest payable on the home loan as well as most other fees and charges you will have to pay. Using the comparison rate gives you a much more realistic idea of the total cost of a loan, and makes it much easier for you to compare home loans.
Tip: If a comparison rate is considerably higher than the advertised interest rate, it would be an indicator to look closely at the fees applied to the loan. To get a more accurate idea of the cost of your home loan, you'd be better off using an online mortgage repayment calculator.
Have any questions about our home loans - or anything else? We’re happy to help, and our local team are available to chat at a time that suits your schedule.