What kind of mortgage should I get?
Getting the right kind of mortgage for your needs is vital part of the home buying process. To make a good choice you’ll need to do a bit of homework, consider your plans and goals, and get sound advice. Here are some common types of loans, along with their pros and cons.
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Fixed rate home loans
Worried about rising interest rates? A fixed rate home loan gives you some certainty – you can fix the interest rate for a period, usually between one and five years. However, if interest rates drop dramatically, you’ll still have to pay at the agreed rate until your period is up. And if you pay off the loan early, by selling the house for instance, you’ll be hit with early repayment fees.
PRO: You know how much your mortgage payments will be for your fixed period so you can budget around that.
CON: You may not be able to make lump sum repayments to pay off your loan faster, and if interest rates fall you won’t benefit.
Floating rate home loans
Floating rate loans allow you more flexibility. You borrow money for a set period of time and make repayments at a level tied to current interest rates. These can vary with fluctuations to the official cash rate. You can make extra payments to pay off your loan faster, and draw down on the mortgage if you have repaid more than you need to.
PRO: If interest rates fall your repayments go down. You have greater flexibility to make changes to the loan, such as paying it off early.
CON: When market rates rise your repayments increase, which can put a strain on your budget.
Combination home loans
The best of both worlds – a combination home loan offers you both flexibility and security. You can fix a portion of the loan at a set rate, and have the rest of the loan at a floating rate.
PRO: The fixed portion gives you some certainty to your mortgage payments, while still having the benefits of a floating rate loan.
CON: If interest rates drop you’ll still be paying a higher rate on the fixed portion of your loan.
Revolving credit home loans
Similar to an overdraft on a transaction account, you can borrow up to a set limit and pay interest at mortgage rates. Income is deposited into the account and withdrawn any time up to the credit limit. Interest is calculated daily and paid monthly so the better your daily balance is; the less interest you will pay.
PRO: You can pay off your mortgage faster. By depositing surplus funds into this account rather than a savings account you will save money on interest.
CON: You need discipline – it can be tempting to spend up to your credit limit on things like cars or holidays, which keeps you in debt longer.
Interest-only home loans
Interest-only offers you a lower repayment, as you are not paying anything off the principal component of the loan. These loans are typically for investors who are hoping to achieve a capital appreciation on the property, while paying as little money as possible.
PRO: You only pay the interest component of your mortgage, freeing up money for other uses.
CON: It’s risky. If market rates decline you could find yourself owing more money than the property is worth.
Mortgage term and repayment frequency
Along with which type of mortgage suits your needs best, you’ll also have to decide the term of the mortgage and how often you’ll make repayments. The mortgage term is how long you will have to pay the mortgage back – the maximum term is usually 20 years for mortgages over 80% of the purchase price of the property, and 30 years for mortgages under 80%.
Most lenders will allow either fortnightly or monthly repayments. It’s best to time your repayments to when you get paid, so as soon as you get money into your account it immediately goes out again.
If you’re looking to figure out how much you could borrow, or how much a mortgage could cost you in the long run, check out our mortgage and finance calculators.