LOAN TYPE OPTIONS

1. Variable Rate Loans

Variable rate loans, often known as “Standard Variable” or “Basic/Base Variable” products, offer an interest rate that fluctuates—most commonly in line with the Reserve Bank of Australia’s (RBA) movements. However, rates can also move independently of the RBA due to changes in lender funding costs.

These loans are popular for their flexibility. Most allow unlimited extra repayments, access to redraw facilities, and may include offset account options. They can also be split, making them suitable for borrowers with loans serving multiple purposes.

✔ Benefits:

• Freedom to make extra repayments anytime

• Access to redraw surplus funds

• Easier to refinance

• You’ll benefit when interest rates go down

✖ Risks:

• Vulnerable to rising rates and therefore higher repayments

Ideal for:
Borrowers who want flexibility, are disciplined with extra repayments, and can manage potential increases in interest rates.

2. Fixed Rate Loans

Fixed rate loans lock in your interest rate for a set period, usually between 1–5 years. Currently, some fixed rates are priced lower than variable options. These loans require more consideration due to their structure and limitations.

Most fixed loans limit redraw and extra repayments. Exceeding these limits may result in break costs—especially if rates fall after you’ve locked in. Also, many lenders apply the fixed rate at the time of settlement, not at application, unless you pay for a Rate Lock.

You can also break up your loan into multiple fixed splits, which can give you flexibility in managing repayment caps.

✔ Benefits:

• Certainty with repayments for the fixed term

• Protection from rising interest rates

✖ Risks:

• Break costs for early repayment

• Limited or no redraw or offset options

• You won’t benefit from falling rates during the fixed term

• The fixed rate may not be the one you applied for (unless rate lock is used)

Ideal for:
Those who value predictability, have a clear financial plan, or are concerned about rising interest rates.

3. Hybrid Loans (Part Fixed / Part Variable)

Hybrid loans combine both fixed and variable components. This offers a balanced approach, giving you some protection from rate increases while maintaining flexibility.

Ideal for:
Borrowers who want a mix of rate certainty and repayment flexibility.

REPAYMENT TYPES

1. Principal & Interest (P&I)

With P&I repayments, you gradually reduce both the loan principal and interest over time—typically over a 30-year term. Early on, more of your payment goes toward interest, but this shifts as the loan progresses.

Repayments are usually calculated based on the full approved limit, not just the balance, and adjust when interest rates change.

✔ Benefits:

• Lower interest rates compared to IO loans

• Ensures you’re actively reducing your loan

✖ Risks:

• Even if you’re ahead on your loan (e.g., via redraw or offset), your repayment amount stays the same

2. Interest Only (IO)

IO loans require you to pay only interest for a set period (usually 5–10 years). After that, repayments jump up as you start paying down the principal.

IO can help with short-term cash flow, especially for investors with tax-deductible debt. However, they often come with a higher interest rate.

✔ Benefits:

• Lower repayments initially

• Can be useful for managing cash flow and investment strategies

✖ Risks:

• Higher total interest over the loan term

• Larger repayments once the IO term ends

3. Interest in Advance (IIA)

IIA loans allow you to prepay 12 months of interest, often before the end of the financial year. This structure can be advantageous for some investors for tax purposes.

✔ Benefits:

• Possible tax benefits

• May offer a slightly reduced interest rate

✖ Risks:

• You need the funds upfront

• Repaying early might forfeit some of the prepaid interest

Ideal for:
Investors who’ve consulted with a tax adviser and benefit from bringing forward deductions.

4. Interest Capitalisation (ICAP)

With ICAP, repayments aren’t made regularly—interest is added to the loan balance. This is usually an option on Line of Credit facilities, bridging loans, or reverse mortgages.

✔ Benefits:

• Useful where repayment deferral is required

• No set end date on some products (e.g., Line of Credit)

✖ Risks:

• Higher interest rates

• Risk of growing debt over time

Ideal for:
Disciplined borrowers with a clear, professional strategy—usually with accountant or financial planner input.

PART C: PRODUCT FEATURES

1. Redraw Facilities

Redraw lets you access extra repayments you’ve made above the minimum. These can be lump sums or regular extra payments. Not all products offer fee-free or unlimited redraw, and access is usually restricted on fixed loans.

✔ Benefits:

• Reduces interest while giving access to funds if needed

✖ Risks:

• Easy access may tempt you to spend the funds and delay paying off your loan

2. Offset Accounts

An offset account is a savings account linked to your mortgage. Instead of earning interest, the balance offsets your home loan principal—saving you interest and tax.

✔ Benefits:

• Keeps savings separate from your loan

• Helps manage tax deductibility (especially for investors)

• Helps reduce interest while maintaining liquidity

✖ Risks:

• May increase loan costs due to package fees

• A basic loan with redraw might achieve similar interest savings at a lower cost

PART D: TYPES OF LENDERS

1. Major Banks

The “Big Four” (CBA, Westpac, NAB, ANZ) dominate Australia’s mortgage market. They have wide branch networks and strong funding models, largely sourced from deposits.

While their rates often require negotiation (“Pricing”), their scale offers reliability in volatile economic conditions.

2. Second Tier Lenders

These include banks like ING, Macquarie, Bendigo & Adelaide Bank, and many credit unions. Regulated just like the majors, they often offer competitive rates, especially on niche or less standard loan types.

3. Non-Bank Lenders / Mortgage Managers / Neo Banks

These lenders don’t take deposits, so they fund loans via wholesale markets. They can be more flexible with credit policy but are more exposed to funding cost changes.

4. Private Funders

Used for unique or complex financial situations. It’s crucial to work with reputable providers. These loans tend to be less price-sensitive and more focused on the lender’s ability to assess risk accurately.

PART E: MAKING GOOD RECOMMENDATIONS

Mortgages aren’t one-size-fits-all. While rates matter, the way your loan is structured and managed often has a far greater long-term impact.

A great broker will help you explore different lenders and different structures to ensure the solution fits you—not just today, but in the future. Legally, we’re also required to challenge your preferences when we believe something else is in your best interest.

PART F: MORTGAGE PRICING CONSIDERATIONS

Several factors affect your mortgage rate:

• Loan Type: Variable vs. Fixed

• Repayment Type: P&I vs. IO

• Loan-to-Value Ratio (LVR)

• Purpose: Owner Occupied vs. Investment

Pricing Trends (Indicative Only):

Owner-Occupied P&IOwner-Occupied IOInvestment P&IInvestment IOExpected RateLowestHigherHigherHighest

Discounts (“pricing”) may be negotiated off a lender’s standard rate—your broker can help secure this where possible.

GLOSSARY OF COMMON TERMS

LMI – Lenders Mortgage Insurance. Protects the lender if you default, required if you borrow more than 80% of the property’s value.

LVR – Loan-to-Value Ratio. Loan amount ÷ property value, expressed as a percentage.

P&I – Principal & Interest. Standard repayment structure where your balance reduces over time.

IO – Interest Only. Only pay interest for a limited time—loan balance remains unchanged.

HEM – Household Expenditure Measure. Lenders’ benchmark for minimum living expenses.

VOI – Verification of Identity. Required by lenders, done in person or online.

Serviceability – The lender’s assessment of your ability to repay the loan, using stress-tested figures.

DTI – Debt-to-Income ratio. Total debt compared to gross income. A DTI over 6 can affect approval.

E-sign / E-docs – Digitally signed loan documents, often speeding up processing.

Wet Signature – Physically signing printed loan documents.

PEXA – Online property transaction platform for faster settlements.

RBA – Reserve Bank of Australia. Determines the cash rate, which influences mortgage rates.