Variable Rate Loans

The interest rate on a variable rate loan will vary over the life of the loan in line with the Reserve Bank of Australia’s (RBA) official cash rate, albeit that the rate on the loan will be higher than the RBA’s official rate.

Most of these loans are principal and interest (P&I) loans with a term of up to 30yrs, however one can get interest only variable rate loans. These loans generally fall into three categories.

Honeymoon Rate variable loans are designed for first home buyers. They provide a discounted fixed rate for the first year, maybe 1% less than the Standard Variable rate, but then revert to the standard variable rate after the first year. The disadvantage with this type of loan is that you are generally locked into keeping the loan for a minimum 3yr period and penalties apply if you wish to refinance or payoff the facility before this period. Honeymoon Rate loans can be linked to Interest Saver/Offset accounts for Mortgage Reduction purposes.

A Basic Variable home loan has the lowest ongoing rate of interest but has few options compared with a Standard Variable loan.

A Standard Variable home loan has a slightly higher interest rate than a Basic Variable, but has more options such as allowing higher repayments to be made with the benefit of a redraw facility should one wish to later draw back out those extra payments, and the flexibility of being able to have a linked Interest Saver/Offset account attached.

Fixed Rate Loans

Whereas Variable Rates are pegged to the RBA’s official cash rate, the key market indicator determining Fixed Rates are bond yields.

A Fixed Rate loan typically allows one the ability to lock in the interest rate for a period of 1 to 10 years on a principal and interest (P&I) basis, or for 1 to 5 years for an interest only facility. The interest only loan is often chosen for investment property purchases as any principal payment on the loan is non-tax deductible whereas all interest payments are deductible.

The advantages are:

  • These loans allow you to more accurately plan your finances as you know what your repayments will be for the life of the fixed term; and
  • You are protected from interest rate rises during the life of the fixed term

The disadvantages are:

  • The fixed rate is often (but not always) higher than the Basic Variable rate as you are paying a premium for the protection against a rate rise
  • If official interest rates fall, you will be stuck with paying a significantly higher rate than that which you would under a variable rate
  • You are generally not able to make additional repayments over and above the set repayment without incurring penalties, or if you are, you are limited in the amount of extra payments you can make
  • They typically do not have the flexibility of an offset account or redraw facility as you would with a Standard Variable Rate loan
  • You may incur a substantial penalty if you wish to refinance or sell your property prior to the end of the fixed rate period (this writer was quoted a penalty of $15K on a property he owns!)

If the advantages appeal to you but you are put off by the disadvantages, consider a combination loan.

Professional Package Loans

A professional home package provides you with a range of discounts on bank accounts and lending products in exchange for an annual package fee. The amount of the discount offered by the lender is determined by the total size of the borrowings. The more you borrow the larger the discount offered. The size of the discount off the standard variable rate ranges up to 0.80% p.a. This discount applies for the life of the loan or until the professional package is cancelled by you.

Usually the package requires the borrower to open a transaction account and credit cards with the lender. The professional home loan package also includes a range of discounts and special offerings as part of the professional home loan package.

Lo Doc Loans

These types of loans have risen greatly in popularity in recent years. They are predominantly aimed at the self-employed and business owners, but many others are taking advantage of them including casual & contract workers. The appeal of these loans is the fact that borrowers do not need to furnish documentation to the lender to substantiate their income. Borrowers need only sign a declaration stating their income.

It’s often best to apply for Low Doc or No Doc loans using a good mortgage broker. They can tell you, before they submit your application to the lender, how much income the lender will likely require for you to qualify for the loan.

These loans also come in all varieties – fixed rate, variable rate, home equity / line of credit type Low & No Doc loans are all available.

Line of Credit

With this type of loan, you can access funds up to your approved limit at any time. Your salary can be paid directly into the loan account and you can access the balance of the loan at any time – like a credit card. You can use these funds to purchase shares, go on holiday, buy a new car, and start home renovations or so much more!

This type of loan is not suitable for many people; therefore we suggest you should check with us to ensure this is the most suitable loan type before you proceed with this loan.

Reverse Mortgage

As governments put more responsibility on individuals to fund their own retirements, many people find that their super and other income sources such as the pension don’t provide enough money to support the lifestyle they want. An obvious option is to sell their biggest asset – their home, but that too may be part of the way they want to live.

This is where a reverse mortgage may provide the answer. A reverse mortgage is available to residential property owners over 60. It allows you to release funds using the equity in your home. You can use these funds as an income stream or for personal lifestyle needs like travel, home improvements etc.

Like a traditional mortgage there’s interest to pay, but you don’t have to make monthly repayments. The interest is capitalised, which means it’s added to the amount of the loan.

When your home is eventually sold you’ll pay back the amount of the loan (the cash you received) plus the interest owing.

There are a range of reverse mortgage options available. Which one is the most appropriate for you depends on your individual circumstances and other factors.

This is where our knowledge and experience can be invaluable. We look at your total situation and work with you to explain all your options and the advantages and risks associated with each. Then they’ll ensure you get the full benefits from the loan of your choice.


Nationwide Accountants & Advisers