Which home loan is best for you?

The world of home loans is full of different options and confusing lingo, which can be quite intimidating to try and figure out. To help you out we’ve put together this home loan guide to help explain the different aspects of a home loan, and the pros and cons of each.

Variable

• If you don’t like to be locked in
• If you want the freedom to make unlimited extra repayments (which most, but not all, lenders will allow)
• If you’re happy to have your interest rate increase and decrease depending on what the market is doing

A variable rate is good if locking your home loan rate in sounds a bit too confining for you. A variable rate generally gives you the freedom to make unlimited extra repayments on your home loan, so they can be good if you’re wanting to pay off your loan quicker. They also give you the freedom to refinance at any time. Sounds pretty good, right? Well, the only thing to keep in mind is that a variable rate increases and decreases with the market, so if interest rates start to rise, your home loan repayments will too! Read more about variable rates.

Fixed

• If you like certainty
• If you want predictable repayments
• If you want to protect yourself from rate rises

Fixed rates are perfect for those who like certainty and want to be able to plan ahead. Because a fixed rate is locked in for your fixed period, your rate (and your repayment amount) doesn’t change. This is great if you’ve been able to get a low rate, and you’re someone who likes to plan out their finances. The downside to fixed rates is that they offer less flexibility than a variable rate. It’s harder to refinance a fixed rate home loan, and you will probably need to pay an additional fee for breaking your fixed term contract. You’ll also have a limit to the amount of additional repayments you can make on your home loan during your fixed period, so paying your loan off quicker will be harder to do. Read our home loan guide “Is a fixed interest rate home loan best for you?” to find out more.

Interest only

• If you want lower repayments
• If you want to maximise your tax deductions
• If paying off your loan quickly isn’t a priority for you

The interest only option is a great way to keep your home loan repayments lower. If you choose to have an interest only period on your home loan, you’ll only need to pay the interest that your home loan accrues for that period of time (usually from 1 - 4 years). And if you’re an investor, these minimum repayments will help to you maximise your tax deductions, because the longer you have your loan, the longer you can claim it as a tax deduction. But just like fixed rates, interest only repayments do mean you won’t be paying off your loan as quick, because you aren’t paying down the principal amount. Just the interest. Which I guess is why they call ‘em interest only loans. Huh! Learn more about interest only loans.

Principal and interest

• If you want to pay off your loan quickly
• If you want to pay less interest
• If you want to increase your equity

Now if you’d prefer to pay off your loan as quickly as possible, a principal and interest loan will be the way to go. Paying off the interest as well as some of the principal amount will ensure that you with every repayment your loan gets a little smaller, which also means you’re paying less interest with every repayment – bonus! Paying off your principal loan amount also increases the amount of equity you have in your home, which you could use for a number of different things in the future.

Live-in

• If you’re going to be living in the property you purchase

Now for the more straight forward stuff. A live-in home loan is a type of home loan you get when you are planning to live in the property you are purchasing or refinancing. They are typically cheaper than investment loans. Also, if you have an investment property that you are wanting to move into, it is possible to refinance your investment loan with a live-in loan.

Investment

• If you’re going to be using the property you purchase as an investment.

And just as you’d expect, investment loans are loans you get when you aren’t planning to live in the property you are purchasing or refinancing. These sorts of loans are typically more expensive than live-in home loans. Just like live-in loans, it is possible to refinance your live-in property with an investment loan, if you plan to move into a different home and keep your current one as an investment property.

Now let’s put it all together…

Variable P&I Live-in

Good if you plan to live in the property, like flexibility, want to pay off your loan quickly, and plan to make additional repayments.

Fixed 1-4 year P&I Live-in

Good if you plan to live in the property and want to lock in a good rate while paying off your principal loan amount.

Variable P&I Investment

Good if you’re financing an investment property, like flexibility, want to pay off your loan quickly, and plan to make additional repayments.

Fixed 1-4 year P&I Investment

Good if you’re financing an investment property, want to lock in a good rate while paying off your principal loan amount.

Variable IO Live-in

Good if you plan to live in the property, like flexibility, and want to keep your repayments to a minimum.

Fixed 1-4 year IO Live-in

Good if you plan to live in the property, want to lock in a good rate, and want to keep your repayments to a minimum.

Variable IO Investment

Good if you’re financing an investment property, like flexibility, and want to maximise your tax deductions.

Fixed 1-4 year IO Investment

Good if you’re financing an investment property, want to lock in a good rate, and want to maximise your tax deductions.

Ultimately there will always be pros and cons to any home loan that you get, it’s just about finding the one that suits your needs the best. If you have questions or would like to chat to someone about your options, let’s talk!