Through our panel of over 40 lenders, Assembly Finance have access to hundreds of different loans, each with their own pros and cons. The best loan structure will depend on your individual goals and circumstances, and in this article we explains the benefits and drawbacks of six common loan types.
Fixed Rate
When borrowing through a fixed rate loan, your interest rate will be fixed at a set amount for a defined period of time, as determined by your lender. Fixed rate loans are a good option if you are buying in a period when interest rates are low and want to lock in the best rate for as long as possible to protect from future increases.
During the fixed rate period, your repayments will stay consistent. This is beneficial for first home buyers and those who may not have the cashflow to deal with increases in repayments. However, you may lose some of the flexibility for additional repayments and offset accounts that may be on offer with variable rate loans.
Variable Rate
A variable rate loan gives your lender the ability to change your interest rate based on fluctuations to the Reserve Bank of Australia’s official rates. Whilst you get to take advantage of reductions in interest rates, you may also be impacted by increased rates which affect your repayment amount.
Variable rate loans are generally quite flexible, and most lenders allow additional payments, refinance options and provision of offset accounts, which means you may pay less interest over time.
Split Rate Loan
If you want to hedge your bets, you can always fix a portion of your loan and leave the remainder on the variable interest rate. This can assist in stabilising a portion of your loan for a period of time while still allowing you the flexibility of a variable rate.
Depending on the lender, a split rate loan may require you to complete two sets of application forms, however you’ll only need to provide one set of supporting documents. Your broker can help speed up the completion of the application forms.
Interest Only
This type of loan is only available only for the purchase of investment properties. You are only responsible for paying the interest on your loan for a set period of time, and at the end of the interest only period your balance will be the same as when you first took out the loan.
Interest only loans can help free up cash for properties that require initial renovations, as the lower repayments allow you to still collect your rental income in the initial interest only period without paying the full principal + interest mortgage amount. They are particularly popular with investors due to the tax ramifications of paying down interest on a negatively geared property portfolio, although you should be certain that a property is going to increase in value before you commit to an interest only loan.
Offset Accounts
An offset account is an add-on offered in addition to many variable rate loans as a benefit for the lender. Any amount that you deposit in your offset account is used to minimise the loan interest, ie. the balance “offsets” the loan amount. For example, if you have a loan for $100,000 and $8,000 deposited in your offset account, your interest would be calculated based on the $92,000 balance. You can access the offset account at any time, so it can be a great option for people who may need access to quick cash in future.
If you’re struggling to work out which type of loan would be best for you, contact Assembly Finance for a free discussion of your personal circumstances and financial goals for the future. Our expert brokers can help find a suitable loan from our panel of over 40 lenders.
