Choosing the right loan
These days there are so many
different lending products on the market that it’s very hard sometimes to work
out which loan offers the best solution to your own financial situation. Nor is
it always easy to plan your financial future in order to know which product has
the features that will save you the most money further down the track.
While the interest rate is
the first feature to look for, there are many other things to consider before
locking yourself in. The ‘best’ loan is not necessarily the cheapest (as with
many other products), nor is it the one with the most features. Often cheapness
means inflexibility – which may cost you more in the long run if you want to
change the way you pay it back. On the other hand, why pay for features you are
confident you will never need?
VARIABLE LOANS are the most commonly utilised loans. ‘Variable’ means the
interest rate isn’t locked in and is likely to vary when official interest
rates change. Most banks offer several variable products. The more features
offered by a loan, the more the interest rate and fees. Features include, for
example, a mortgage offset facility and a re-draw facility (which is useful as
long as you’re disciplined enough not to keep drawing the money out to use for
lifestyle purposes).
FIXED INTEREST LOANS offer, as the name suggests, fixed interest rates on your
mortgage for a specified time. This is useful in times of rising interest rates
as the schedule of re-payment is set in advance and borrowers can budget more
easily because their costs are fixed and predictable. However, it is worth
noting that fixed interest rates are usually higher than variable ones to
protect lenders from losses as a result of fluctuations – and they have an
early termination penalty as well.
SPLIT LOANS or combination loans allow borrowers to have half their loan
as a variable loan and half as a fixed interest loan. This means that no matter
what happens to interest rates, they are protected from the full force of the
lending conditions becoming less favourable to their choice.
INTRODUCTORY RATE LOANS have a ‘honeymoon’ period where the rates are lower,
then the rates go up as the period of the loan gets longer. It’s important to
weigh up the long-term costs (the term of the loan is likely to be 25 years so
any savings are likely to be absorbed) against the short term benefit. It works
well for those who are expecting to have more money as time goes on, or if
property prices are rapidly rising and it’s the only way you can afford to get
into the housing market. Re-financing introductory rate loans can be expensive
and early termination of the loan may incur penalties.
INTEREST-ONLY LOANS enable borrowers
to repay the interest only for a designated number of years of the loan term.
There are several other special loans available including Line of Credit or
Equity loans (these often suit investors increasing their property portfolio)
and Low Documentation loans (which often suit self-employed borrowers). Check
with your financial adviser and bank to see if there is a loan variation that
suits your particular situation better than the standard loans on offer.
