Types of home loans - the pros & cons

There are various species of home loan and choosing the right breed can save you thousands of dollars and years of repayments. So which mortgage is best in show? Here's a quick reminder of your options:

Variable home loans

Your interest rate changes with Reserve Bank rates (or if a bank feels generous or greedy). The two subspecies of variable home loans are basic variable loans and standard variable loans. In general, basic is code for a cheaper rate with fewer features; standard is best if you want to pay your mortgage off more faster than the full term - but this can vary between banks, so it's best to pay more attention to the details and less to the name.

Pros:

• Repayments are less when Reserve Bank interest rates fall
• Standard variable loans typically offer features such as - redraw facility (taking out money you've already paid in, perhaps for a renovation), Introductory rates, or "honeymoon" rates, additional payments, without an extra fee for paying off your mortgage sooner

Cons:

• Repayments rise when rates go up
• Standard variable loans have higher rates than basic variable loans, to pay for their features

Take me to the variable rate home loans!

Fixed rate home loans

Your home loan rate on the principle and interest is fixed for a 'lock in' period - usually 1 to 5 years. At that point, you can choose another fixed rate period (at current rates) or change to variable interest rates.

Pros:

• Loan repayments are fixed, so you're not exposed to interest rate rises
• Budgeting is made easier, as monthly Reserve Bank announcements won't change your rate

Cons:

• Your interest rate won't fall if official rates go down
• Additional payments may be limited
• Fees and penalties can apply to an early payout

Show me the fixed rate home loans!

Introductory home loans

A glorious low rate applies to an initial period - usually 1 year. Then rates will rise.

Pros:

• Lowest rates around - for a bit
• You can knock down the principal quickly while the rates are low
• First home buyers can get a foot in the door of the home loan market
• Rates can be fixed or capped once the introductory, or "honeymoon" period expires

Cons:

• The honeymoon always comes to an end, whereupon repayments will rise
• The standard rates post-honeymoon may not be competitive with other current mortgage rates
• Exit fees can make a mortgage divorce unattractive

Compare intro rate home loans.

No fees home loans

Hate account fees, monthly fees, upfront fees? Well these are the home loans for you.

Pros:

• No ongoing fees! (Although there's often an exit fee)
• No fees for redraw, or extra repayments
• Low fee home loans can combine fewer fees with lower interest rates

Cons:

• NInterest rates may be higher

Show me some no fee home loans!

Split rate home loans

This one lets you hedge your home loan bets, with part of your loan at a fixed interest rate, and the remainder at variable interest.

Pros:

• Rate rises won't hit as hard with part of your loan at a fixed rate
• You still benefit from falls in the interest rate
• Additional payments are typically allowed on the variable rate amount of your loan

Cons:

• Loan repayments can still rise
• Additional payments are limited

Where are these so-called split rate loans?

Interest only home loans

An interest only period (typically 1 to 5 years) means that you pay off the interest only, rather than the principal, so repayments are much lower. After that, however, you'll have to make principal and interest repayments for the remainder of the loan.

Pros:

• Low repayments at the start of the loan - You can put the money saved towards renovations
• Investment property: a cheap way to get in to the market
• Investment properties: gives you the ability to manage cashflow or tax

Cons:

• Yes, sooner or later there'll be a big rise in your repayments. First home buyers: if you can't afford principal and interest repayments to begin with, this is not a cheap way in
• Considerably higher cost over the full term of the loan

Line of credit home loans

This home loan lets you access equity in your property for investments, etc. So you make repayments on the loan, but can also draw against the amount paid off. Each month, there's a minimum interest-only payment.

Pros:

• Flexibility for investments
• You can pay off high interest rate credit cards or personal loans. Consolidate loans under the one rate. Home loan interest rates are typically less than credit cards and other loans
• Affordable over the life of the loan if regular principal and interest payments are made

Cons:

• Higher interest rates usually apply
• Can reduce equity in your property if mismanaged
• Vastly more expensive over the life of the loan if interest only payments are misused

Check out some line of credit home loans!