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Understanding different types of interest rates

10 Apr 14

One of the first factors you will need to consider when buying a property is the type of home loan you are going to sign up for. There are various different types available, so it is essential to select the one that is best suited to your needs.

As anyone who has undergone real estate training will tell you, the home loan with the lowest interest rate might not necessarily be the best option. In light of this, make sure you spend some time getting to grips with the ins and outs of each product before making your final choice.

Fixed rate products

Fixed-rate home loans are finding favour with buyers at the moment and with the cash rate at an all-time low, it's not difficult to see why.

A fixed rate mortgage enables you to lock in an interest rate on your loan for a set period of time, usually between one and five years.

This gives you a certain degree of security, as you know your repayments won't fluctuate in this timeframe. If interest rates fell further, however, you wouldn't reap the benefits.

Variable rate products

Another option open to property buyers is a variable rate mortgage. If the cash rate were to fall further, you would be able to make the most of the decline if it was passed on by your lender.

Be aware that the opposite could happen - if the cash rate rises, so will your home loan repayments, so from a budgeting point of view you might find yourself on tenterhooks.

Interest-only home loans

An interest-only home loan does exactly what it suggests - you just pay off the interest your mortgage accrues.

This can be a great option if you want to keep your loan repayments to a minimum, but in theory it means that the mortgage will never be fully paid off. It is also worth nothing that after a certain time frame, you'll be expected to pay off the whole balance in one lump sum.