Home loans come with different types of interest rate structures, each with its own set of advantages and considerations. Here are the main types:
1. Fixed Rates
- Description: The interest rate remains the same throughout the fixed rate loan term which can be anywhere between 1 and 4 years (generally).
- Pros: Predictable payments; protection against interest rate increases.
- Cons: Higher initial rates compared to variable interest rates loans; no benefit from a potential decrease in interest rates.
2. Variable Interest Rates
- Description: Variable interest rates can fluctuate during your loan term which can be up to 30 years
- Pros: Lower initial interest rate when compared to fixed-rate loan
- Uplift from interest rate reductions in the market
- No limitation on repayments
- Access to offset accounts and redraw
- Cons: Uncertainty of market and interest rate increases
3. Interest-Only Rates
- Description: For a certain period (e.g., 1-5 years), borrowers pay only the interest on the loan. After this period, payments include both principal and interest.
- Pros: Lower initial payments; flexibility in managing cash flow.
- Potential taxation benefits
- Cons: Potentially no equity built during the interest-only period; potential for higher payments later.
4. Split loans (Fixed & Variable) Rates
- Description: a combination of fixed interest rate and variable interest rate loans. Typically, the interest rate is fixed for an initial period and then converted to variable after the fixed rate expires (e.g. 1-4 years)
- Pros: Predictable payments; protection against interest rate increases on the fixed loan.
- On variable loan, lower interest rate
- Access to offset accounts and redraw
- Cons: Higher initial rates on the fixed loan component and no benefit from a potential decrease in interest rates during the fixed rate period.
- On the variable loan, the uncertainty of market and interest rate increases
Understanding the differences between these types of home loan interest rates can help borrowers choose the best mortgage option for their financial situation and goals.
For more information, please contact us.
Written by Juan Castano Quirama
Finance Broker
0434 309 884