Wednesday, 20 September 2017

Loan Types and Features

Rates

Variable Rate

A variable interest rate will move in line with the market rate, which is generally the cash rate set by the Reserve Bank of Australia (RBA). The main benefit with variable rate loans is they provide flexibility and options.

Fixed Rate

A fixed interest rate will not change during the fixed term. You are given certainty about your repayments, although you may be limited with the amount of extra repayments you can make and the redraws that you can take.

You can split your loan between a variable rate loan and a fixed rate loan.

Repayments

Principal and interest

With principal and interest repayments, each of your repayment includes a principal component so that your loan is paid off steadily over time. At the beginning of your loan, the majority of your repayment goes towards the interest component. Towards the end of your loan the majority of your repayment is for the principal component.

Interest only

You can defer paying your principal for an agreed period (up to 15 years) and minimise your loan repayments. This type of repayment is especially effective for people with investment properties as it allows them to focus on non-deductible debt. During the interest only period you may pay down the principal whenever you choose. At the end of the interest only period you will start to make principal and interest repayments for the remaining term of the loan.

Other features

Package

This feature is appropriate for people who have a large combined total borrowing (more than $250,000). There is an annual fee involved (around $400/year), but this is usually offset by the benefits gained in taking out a package. Some of the features include:

  • Extra discounts (up to 1.1%) - the more you borrow the more discounts a lender is willing to give.
  • Free offset facility
  • Free redraw
  • Fee-free savings account
  • No annual fee on credit card
  • Discounts on financial products
  • No fees on additional loans