Perfect Fit

Here are some types of loans that suit different borrowers

1. Standard Variable Rate

Suited to: Most Borrowers

How it works 

It allows borrowers to inject more money to repay loan so you can pay off your principal sooner and consequently reduce your interest repayments. This type of loan also easier to switch loans such as fixed rate. The variable interest rate is set with reference to the Reserve Bank of Australia's (RBA) official cash rate. 

The Upside

Flexibility: It offer borrowers flexibility with range of optional features, such as redraw facility, offset account, extra repayments or access to a line of credit. These features help to reduce the overall term and cost of your loan.

The Downside 

Higher Rate Than Basic: The interest rate is generally higher than basic variable home loan rate.

Unexpected Rate Movements: The rates sometimes are not aligning with RBA cash rate.  Some banks recently rose their interest rate beyond RBA levels.

2. Fixed Rate

Suited to: Those who want the certainty of knowing what their repayments are each month

How it works

It let you lock in an interest rate for a specified term from six months to 10 years. Fixed rate can save borrowers in a rising environment but if rates fall it will be more costly than variable rate.

The Upside

Certainty: Borrowers know exactly what will they pay regardless of market condition.

Specials: Lenders often have specials on fixed rate products

The Downside

Little To No Flexibility: Borrowers are locked into the loan for a set period of time so only commit if you are confident you can see the loan term through.

Exit Fees: These can be hefty if you decide to pay out the loan before the end of the fixed term.

Break Costs: This is usually the interest and fees you would have otherwise been required to pay during the fixed term.

Knowing When To Fix: Trying to beat the market with fixed rate is very though. Rule of thumb, the lowest fixed rates are usually available when variable rates are between three and nine months off hitting their lowest level.
A word from expert:

"While fixing can be considered an insurance policy against raising interest rates, borrowers might actually be better off paying a higher interest rate under a standard variable loan and simply inject more money into the loan during the loan term."

3. Basic Variable Loan

Suited to: Any borrower who is looking for a 'No Frills' loan solution with a lower variable rate

How it works

Basic variable home loans are not the same as standard variable loans. While a standard variable loan can be packaged up with an everyday savings account, offset account, credit card, and so on, a basic variable loan does not generally have these features.

The Upside

Lower Rates Than Standard: Basic variable rates have been known to be lower than their standard rate counterparts by as much as 0.5 % per annum.

The Downside

Rates Can spike: It can fluctuate depending on changes to the RBA's official cash rate. A basic variable loan may also have restricted flexibility, like limitations on rate fixing.

A word from expert:

"Basic variable loan is suitable for those who are looking to borrow a smaller amount of money. But be careful, some lenders won't allow you to fix the whole amount under basic variable loan."

4. No Deposit or Low Deposit Loans

Suited to: People with little or no deposit 

How It Works

It is designed for borrowers with good income but lack of full deposit. Some lenders have tightened their lending policies due to global financial crisis, there are still 100% loans on the market - but they are tough to secure. Typically, 95% loan is the highest loan that likely to get. Any loan above 80% requires additional cost of lender's mortgage insurance (LMI) but this may be worth the expense if it means getting into your property sooner. Family pledge loans also allow you to use the equity in relative's property to cover your deposit, and borrow the rest to buy the property.

The Upside

No Savings Required: For those who pay rent, or are simply struggling to save up a 5 or 10% deposit, using family equity means you may still be able to secure a home loan.
The added benefit is that by reducing your loan with family equity, you can capitalise the LMI on top of the borrowing amount.
Concurrent Loans: Some lenders may offer a personal loan on top of a home loan to cover purchase costs such as stamp duty and legal fees. This loan may attract a different interest rate to the home loan and reduce the amount you will have to borrow under the home loan - and therefore, reduce your LMI risk.

The Downside

High Risk: It carry more risk to the borrower and his family.
Terms and Conditions: There are strict terms and conditions that apply to a no deposit loan.

5. Introductory Rate

Suited to: First home buyers

How It works

"Honeymoon" rate loans provide borrower with cheaper interest rate (up to 1% off the standard rate) for the first 12 months. They may be fixed, variable or capped and usually revert back to the lender's standard variable rate after the introductory period.
The Upside
Low Initial Interest Rate: The lower repayments in the early stages of your home loan may help you to better allocate your money when you buy your first home, allowing you to either pay more towards your mortgage or cover other buying expenses.

The Downside

Cut Corners: it has reduced features
Higher Fees: Introductory loans can have higher early repayment or exit fees, higher establishment and ongoing fees, and limited extra repayment options during the introductory period than a standard variable home loan.
Time Periods: Lenders can be strict about how long you must stay in the loan after the honeymoon period is over. This means borrower have reduced ability to refinance and may have to pay extra fees if you decide to do so.