How to choose the right home loan for you

When you're ready to buy a house, one of the biggest decisions you'll have to make is which home loan to choose. To assist you in making the decision that's right for you, we examine the differences between home loan types, as well as the pros and cons of each.

Variable Home Loan

A variable interest rate can change at any time during the term of your loan, impacting the amount you repay every month. This change might occur due to changes in the market, a rate change by your bank, or shifts in the RBA’s official cash rate.

Pro: 

• Because interest rates may potentially decrease, you can potentially reap the benefits if the market shifts in your favour. 

• Variable interest rates also offer more flexibility, you can make unlimited additional repayments, potentially reducing the life of your loan, and minimising the interest you pay overall. 

• Unlike fixed loans, there are no break costs so you can refinance at any time.

Con:

• Because interest rates may potentially increase, you can leave yourself vulnerable to unfavourable market changes. 

A variable interest rate may be the right choice for you if: 

• You want the freedom to make unlimited extra repayments (your lender may or may not offer this option).

• You’re happy to have your interest rate (and repayments) increase and decrease depending on the market. 

• You want the flexibility of being able to refinance your home loan if you choose, without having to pay a ‘break’ cost. 

Read more about variable rates

Fixed Home Loan

Fixed rate loans are perfect for those who like certainty and want to be able to plan ahead. That’s because a fixed rate loan is locked in for your fixed period, which means your rate (and your repayment amount) doesn’t change. 

Pro: 

• This might make budgeting a little easier, because you’ll pay the same amount of interest each month for a fixed period of time.

• During the fixed term your interest rate will not change, which will protect you in an increasing rate rise (although you will not benefit from a rate reduction). 

Con: 

• Generally, a fixed interest rate is higher than a variable rate. Which means you might pay more interest during a period of stable or decreasing interest rates. So, it’s important to do your research because once you’ve locked in a rate, it remains for the term of the loan.

A fixed interest rate may be the right choice for you if:  

• You want predictable repayments.

• If you want to protect yourself from rate rises.

• If your circumstances are unlikely to change and you won’t want to make significant additional repayments; or refinance your loan.

Read more about fixed rates home loans

Owner Occupied or Investment Home Loan?

Before deciding which to go with, you should first think about the purpose of your loan. Are you looking to build an investment portfolio - or are you after a home to live in? 

An owner occupied home loan is a type of home loan you get when you are planning to live in the property you are purchasing or refinancing. 

Whereas investment loans are loans you get if you are planning on renting or if you aren't planning to use the property as your primary residence.

Typically you will pay a higher interest rate for investment loans and you might need a larger deposit - so your loan-to-value ratio might need to be higher.

You can generally refinance between the two types of loans if you are not currently on a fixed interest rate loan - but there are some restrictions that you should be aware of before you choose the right home loan type for you.

Repayment Choices

Once you’ve made the decision to go with either a fixed, or variable rate, you’ll then need to decide on the repayment type.

Principal and Interest

With this type of home loan, you’ll need to pay both the principal as well as the interest charged on it.

Pro: 

• If you’d prefer to pay off your loan as quickly as possible, a principal and interest loan is a great way to go. 

• Paying off the interest as well as some of the principal amount will ensure that with every repayment your loan gets a little smaller, which also means you’re paying less interest with every repayment. 

• Paying off your principal loan amount also increases the amount of equity you have in your home, which you could use in the future.

Con: 

• Repayments are higher than interest only loans and may not be as tax-efficient for investment loans.

A Principal and Interest only rate may be the right choice for you if: 

• You want to pay off your home loan sooner.

• Want to increase the equity in your home.

Ultimately, there will always be pros and cons to any home loan that you get, it’s just about finding the loan with repayments that suits your needs the best.

Interest Only

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 - 5 years). But interest only repayments do mean you won’t be paying off your loan as quickly, because you aren’t paying down the principal amount. Just the interest. 

Pro: 

• Monthly payments are low during the term and these minimum repayments help to maximise your tax deductions.

Con: 

• Interest only loans are for a certain amount of time only and you will eventually have to pay interest and principal every month. When this occurs, the payment could increase significantly, leading to what is called ‘payment shock.’

An Interest only rate may be the right choice for you if: 

• 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.

Tips on how to choose the right home loan for you

Important things to consider when choosing a home loan:

• Interest rate. Try to find a loan with a competitive rate and the features you need - keep reading to find out more. 

• Loan term. This impacts the size of your repayments and the interest you’ll pay, so aim for the shortest term you can afford. Remember that shorter terms equate to higher repayments, but less interest over the term of the loan. 

• Fixed or variable interest rate. A fixed rate helps you budget because your repayments remain the same, but you won't benefit if interest rates fall. A variable rate is generally lower than a fixed rate and usually offers more loan features, but your repayments will go up if interest rates rise.

• Loan features. These include redraw or line of credit facilities and an offset account so you can put extra money into your loan to reduce the interest you pay. Most cost extra, so choose a loan with features you’ll use.

• Loan fees. These can include application/establishment fees, valuation fees and settlement fees, as well as ongoing fees.

To find out more about upfront costs for home loans, contact a Qantas Money Home Loan expert on 1300 992 700, or +61 2 8222 2569 if you are overseas.

^* You have to be a Qantas Frequent Flyer member to apply for the Qantas Home Loan. This information has been prepared without considering your objectives, financial situation or needs. You should consider your circumstances before acting on this information.