In a fixed rate loan product, the banks and lenders fix the rate of interest for a period of 1 to 5 years for home loans.
During this period the repayments remain the same. Any change of interest rates by RBA or banks doesn’t change the interest rate for that loan and doesn’t affect repayments.
While fixed rate has an obvious advantage of safeguarding any future interest rate hikes. It has many disadvantages as well. Customers can’t make extra repayments to save interest and are not benefitted by any reduction of interest rates. Moreover, any changes during the fixed period also results in break costs.
As the name suggests, it is a combination of fixed and variable loan components for a home loan.
In the split loan arrangement, part of the home loan is on variable interest rate and the the other part on fixed interest rate for a specific period.
Example: John borrows $500000 to buy his first home. He selects a split loan product.
He selects variable interest rate for $250000 and selects fixed rate interest rate for rest $250000 for a period of 3 years.
While the repayments for variable part and change if the lender increases or reduces interest rates, the repayments for fixed part would remain same for 3 years.
Interest only loans are mostly used by investors to give better cash flow which helps in funds being used for other projects. As the repayment is low, it allows the investor to cover these repayments from the rent.
For interest only loan products, the borrower only pays interest on the loan for a fixed period. It means that the loan amount remains same even after yearssince no principal has been repaid.
Banks and lenders are more strict while lending for interest only products due to the higher risk involved and strict legislation.
An offset account is a savings account which is attached to a home loan account. Any money deposited in this account reduces the amount of interest a borrower pays for that amount.
Although the repayment remains the same, the interest component in the future repayments reduces. This helps in earlier and quicker repayment of the loan.
Another major advantage of an offset account is that the borrower has a flexibility of withdrawal of funds if and when they need.