your 5 minute guide to home loans and interest rates
20 December 2010
A home loan is the most common means of buying your own property. Home loans are provided by a lender, most often a bank, on the basis that the initial amount borrowed (the principal) will be repaid on a regular set basis, together with interest, which is essentially a fee charged by the lender for borrowing the money.
There are two main kinds of home loans available: variable and fixed. With a variable home loan, the interest rate charged varies over the term of the loan. Variable interest rates generally fluctuate according to the official cash rate determined by the Reserve Bank of Australia (RBA). Economic conditions are the main drivers for the RBA's decisions.
There are also two types of variable home loans available: standard variable, and basic variable. Standard variable rate home loans are the most popular kind of variable loan, but often come with a slightly higher interest rate because they provide borrowers with access to a number of features including redraw facilities and the option to make additional repayments. Basic variable rate home loans often have the cheapest interest rates available, because they are a "no-frills" option with a limited number of features. Usually, borrowers are unable to make additional repayments against such loans or vary their repayment schedules.
The fixed rate interest home loan is another popular option for borrowers. These loans "lock in" a certain interest rate - usually slightly higher than a variable rate loan at the time of signing - for a certain period. The benefit of fixing an interest rate is that if variable interest rates go up, then your repayments will remain unchanged.
Another home loan which combines both variable and fixed interest rates is called a split home loan, which essentially hedges your home loan interest rate bets. Part of the loan is set at a fixed interest rate, while the remainder is subject to a variable interest rate.
There are a number of other different kinds of home loans available, but the bottom line for any borrower is: how can you secure a home loan with the lowest interest rate and the best features that meet your financial needs?
One home loan that is increasingly popular for this reason is Bankwest's Rate Cutter Home Loan, in which borrowers receive an initial 0.4% per annum discount off the standard variable rate and then an additional 0.1% per annum discount each year for the next four years. That's a total discount of 0.8% per annum that you keep for the life of the loan, which can easily add up to many thousands of dollars of savings.
Unlike the "no frills" basic variable rate home loans, Bankwest's Rate Cutter Home Loan provides flexible repayment options, as well as no monthly maintenance fees and no penalties for early repayments. Furthermore, new customers can borrow up to 95 per cent of the property value.
If you are a first home buyer or an existing home owner, investing or refinancing, the Bankwest Rate Cutter Home Loan is a popular home loan because it offers discounted interest rates, plus all the benefits of a fully featured home loan.
Important things you should know:
For the Bankwest Rate Cutter Home Loan, lending criteria, fees and charges apply. Terms and conditions apply and are available on request. The standard variable rate is the variable Bankwest Mortgage Shredder Reference rate. Minimum loan size is $20,000.