Choosing the right mortgage is crucial when buying a home. Different types of loans come with varying interest rates, fees, and flexibility, all of which impact the overall cost and the time it takes to pay off the loan. Here’s a breakdown of the most common home loan options to help you make an informed decision.

1. Table Loan

The most common home loan type, offering terms up to 30 years. Interest on a table loan can be fixed or floating.

Early repayments primarily cover interest, while later payments focus on the principal (the amount borrowed). The longer you make the loan term the smaller the principal repayments will be at the beginning of the loan. It can take a while to get your head around so I explain in more detail how loan amortisation works in this article.

Advantages include regular payments with a set end date and the certainty of repayment amounts for fixed-rate loans.

2. Revolving Credit Loan

This flexible option works like a large overdraft. Your pay is deposited directly into the account, and bills are paid from it. Interest is calculated daily, so keeping the loan balance low reduces costs. It allows for lump-sum repayments and redrawing funds up to the credit limit. Account base or transaction fees may apply for day-to-day banking.

A revolving credit home loan offers several advantages, making it a flexible and convenient financial tool. It allows you to borrow and repay funds as needed, up to an approved limit, which is especially useful for managing unexpected expenses or opportunities. Interest is charged only on the amount you use, not the total credit limit, potentially reducing costs. You can also save on interest by depositing surplus funds into the loan account, lowering the outstanding balance without penalties for early repayment. Accessing funds is simple and convenient, often through online banking, debit cards, or checks. This type of loan can support various financial goals, such as home renovations or investments, without the need for additional loan applications. Additionally, it offers the flexibility of no fixed monthly payments, making it easier to manage during periods of fluctuating income or expenses.

Managing a revolving credit loan requires discipline to avoid overspending and extending debt so they are not suitable for everyone.

3. Offset Loan

An offset loan links your mortgage to savings or everyday accounts to reduce interest. Interest is charged on the loan amount minus your savings. For example, with a $400,000 loan and $120,000 in savings, interest applies only to $280,000.

An offset home loan can provide several advantages. First, it reduces the interest payable on the home loan by offsetting the loan balance with the funds in a linked account, effectively lowering the principal amount on which interest is calculated so that more of your payment goes towards principal repayment, paying the loan down faster. This setup allows borrowers to save on interest while still having access to their funds for other purposes (however linked accounts do not earn interest), offering flexibility and liquidity.

Additionally, the savings from reduced interest payments can help borrowers pay off their home loans faster, as more of their repayments go towards reducing the principal. It also eliminates the need to transfer funds back and forth between accounts to maximise savings, simplifying financial management.

Lastly, this type of loan can serve as a financial buffer, giving borrowers peace of mind by allowing them to access their funds in case of emergencies while still keeping their loan repayments on track.

4. Reducing Loan

Also called a straight-line mortgage, this option features consistent principal repayments, with interest reducing over time. Payments start high and decrease over time. Fees are similar to table loans.

Advantages include lower overall interest compared to a table loan and suitability for borrowers expecting lower future income. The disadvantage is that high initial payments may be challenging.

5. Interest-Only Loan

This type of loan focuses solely on interest payments for a set period, keeping repayments lower. It is typically used by property investors who want to manage cashflow or for short-term financial flexibility before switching to a table loan.

The advantage is that your payments are lower given there is no principal repayment at all, freeing up cash for other expenses like renovations.

An interest only loan will result in higher overall interest costs since the principal remains unpaid during the interest-only period.

Interest Rate Options

Fixed interest rate loans have a rate that stays the same for 6 months to 5 years. The advantages include predictable repayments and protection against rising market rates. At the time of writing fixed rate loans are considerably cheaper than floating rate loans. However, these loans offer limited flexibility for extra payments, and breaking the loan early can result in fees.

Floating interest rate loans have rates that fluctuate with market conditions. The advantages include flexible repayment options and easier consolidation of other debts. However, payments can increase if rates rise.

A split loan combines the stability of fixed rates with the flexibility of floating rates. Portion sizes depend on your priorities.

Making the Right Choice

When choosing a home loan, consider your income. Regular income may suit fixed repayments, while irregular income favors flexible loans. Reflect on your goals: do you prioritise paying off the loan quickly or maintaining flexibility? Lastly, evaluate market conditions. Fixed rates are ideal in a rising rate environment, while floating rates work well in a stable or falling market.

Take the time to assess your needs, consult with financial professionals, and explore the options available to find the loan that best fits your situation.

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