There are many different types of home loans offered by Australian mortgage lenders. The range is so huge that looking for the right loan can leave many prospective borrowers, particularly first time home buyers, feeling confused and disoriented.

Here’s a quick look at the major mortgage lending options for property buyers.

Variable Interest Rate Loan

This is the most common type of home loan. As the name suggests, the interest rate can vary, going up or down depending on the interest rates set by the Reserve Bank of Australia (RBA). Borrowers are hopeful that when the RBA cuts interest rates, their mortgage rates will drop too, resulting in smaller repayments.

Unfortunately, when the RBA announces a rise in the interest rate, mortgage providers are often quick to increase their interest rate too. However, when the RBA reduces rates some lenders may not pass on the full amount. Contact the lender and ask for a lower rate whenever interest rate cuts are announced by the RBA.

There are two types of variable rate home loans – standard and basic. Standard variable rate loans offer features such as offset accounts, redraw facilities, extra repayments and loan portability. Basic variable rate loans are cheaper but lack the features offered by standard variable rate loans.

Fixed Interest Rate Home Loan

Borrowers who choose fixed rate home loans can fix the interest rate for a specific period of time, from a few months to several years. So even it the RBA announces an interest rate increase, those with this loan will only need to pay the same amount of repayment every month for during that time. Conversely, if interest rates drop, they will be stuck with paying more than borrowers who have taken out variable rate loans.

When the fixed term expires, the borrower can fix another term or opt for a variable rate loan. The mortgage lender may charge a penalty fee if the borrower wants to renegotiate the loan. For example, change it into a variable rate loan during the fixed term or make extra repayments to save on interest.

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