Whilst the core loan products are quite stable, the Australian mortgage market doesn’t stand still. New deals, special rates and limited offers come and go almost every day. So much so, interest rate websites can’t cope.

Your Mates Rates mortgage broker has access to up to the minute information on 400+ different mortgage products from our leading panel of mortgage lenders. Using this information, leading edge independent tools and a wealth of professional experience, your mortgage broker ranks these home loan deals to find the right loan and lender for you.

What types of home loans are available?

The information on this page will help you understand the basic loan types, although the features, how much they cost and how they affect you varies lender to lender.

When you are ready to find a home loan with someone you can trust, talk to a professional.

Request a free appointment – No charge, no obligation and with the comfort of a time and place that suits you. You can also call us on 1300 55 81 61.

Principal and Interest Home Loan

Principal is the actual money you have borrowed and interest is the fee lenders charge you whilst you owe this money. A Principal and Interest home loan is simply one which includes an allocation for repayment of the principal together with the interest charge in your regular minimum repayment.

Pros:

• Your loan is repaid with each installment with reduces interest costs and increases the equity in your property.
• Minimum repayments are higher as they include the interest charge together with an allocation for principal.

Cons:

Interest-Only Home Loan

The name says it all. Repayment of the principal is deferred for an agreed period (usually 1-5 years) and dring this time you only pay the interest charges which results in a lower minimum payment as there is no allocation for principal. At the end of the interest only period – usually one to five years – you must start making Principal and Interest Repayments over the remaining term of the loan, although some lenders will also allow you to extend the interest only period.

Pros:

• Payments are lower during the interest only period offering you time to adjust or freeing up money to renovate or improve the property.
• For investment properties, it lowers payment commitments enabling you to maximise payments any non-deductible debt
• Maximises mortgage rebates if you take an Ongoing Rebate Payment
• Payments increase at the end of the Interest Only period
• Overall interest costs wind up more expensive than paying Principe and Interest
• Many lenders assess your ability to repay the loan only on the principal and interest repayments over a shorter repayment term which can reduce your borrowing power

Cons:

Basic Variable Home Loan

Interest charged on all variable rate mortgages moves up or down in accordance with movements in interest rates, which are set by your lender with some guidance from the Reserve Bank of Australia.

Basic variable loans have a lower interest rate and generally have fewer loan features than a standard variable loan. Over the years, basic variables have increased in flexibility with many accepting extra payments and allowing redraw which is the ability to take out any extra money that you have put in,

Features and flexibility vary wildly with basic variable mortgages with some prohibiting extra payments, whilst others include a 100% offset account. Very few have sufficient features that will allow you to minimise interest costs for that loan without quite a bit of hard work with manual transfers often being required for redraw and extra payments,

Pros:

• Minimum repayments fall when lenders lower interest rates
• You can usually pay off the mortgage quickly by not having any penalty for advance payouts
• Usually have a lower interest rates

Cons:

• Repayments rise when lenders increase their mortgage interest rates
• Wide variation in flexibility and cost to deploy features makes comparison quite difficult without the right tools and experience.
• For loan amounts of $250,000 or more, Standard Variable offers greater flexibility and if packaged may also have a lower interest rate
• Rapid rate hikes can catch you off guard and place you under financial pressure
• Flexibility features often carry limitations and fees which really add up (like ATM or EFTPoS fees on redraws)

Standard Variable Home Loan

Like a basic variable loan, interest moves up or down in accordance with movements in interest rates, set by your lender.

Standard variable loans may appear to have a higher interest rate however for loan amounts above $250,000, generous discounts are available for packaged banking. Discounts increase as total borrowings increase.

Standard variable loans are the rolls royce of mortgages and generally have an extensive range of loan features ranging from offset accounts through to portability, fee free redraw and beyond.

Pros:

• Repayments fall when lenders lower interest rates
• Can usually be split with fixed rate mortgages to help protect against rate hikes.
• Standard variable loans offer flexibility and many additional features
• Packaged banking can deliver a far more flexible mortgage at a lower effective cost than variable through interest rate discounts which increase as loan amounts increase
• Taking a banking package also includes other benefits such as fee free banking and discounts on other finance products such as financial planning, insurance and more.
• Incurs a higher interest rate for lower loan amounts and non-packaged loans
• Repayments rise when official interest rates rise
• Wide variation in flexibility and cost to deploy features makes comparison quite difficult without the right tools and experience.

Cons:

Fixed Rate Home Loan

The interest rate on a fixed rate loan does not change during the fixed rate period which also means your minimum  payment does not change either.

The ‘fixed rate period’ can vary, but you can usually “lock in” your repayments for between 1-5 years, with some lenders having 7, 10 and 15 year terms.

At the end of the ‘fixed rate’ period’, you can decide whether to re-fix you rate or allow it to roll over to a variable rate. Although the fixed rate period may only be a few years, the full loan term is longer and often set at 25 or 30 years.

Pros:

• You can be confident of repayment commitments during the fixed rate period.
• Provides peace of mind if you are concerned about rate rises
• Allows more precise budgeting
• Interest rates are usually higher than a Standard or Basic variable loan
• Most lenders only allow only limited additional payments
• Redraw is rarely available
• Often carries an unknown penalty for early payout of the loan
• Some lenders change to Basic Variable rate at the end of the fixed rate period, whilst others revert Standard Variable making comparison quite difficult without the right tools and experience.

Cons:

Split Rate Home Loan

A Split Rate home loan allows your total borrowings to be split part fixed, part variable There are usually quite small minimum loan amounts so you can decide how much to allocate to each based on your personal appetite for risk and interest savings.

Your Split Rate home loan combines the Pro’s and the Con’s of each loan type that you combine in the splits.

Capped Rate Home Loan

A Capped Rate Home Loan is a hybrid home loan with a variable interest rate up to an agreed interest rate. If the lender increases variable rates above the cap, your interest rate remains fixed until either rates fall below that rate or your capped rate period expires.

Pros:

• Minimum repayments fall when lenders lower interest rates
• Variable rates will often remain lower than fixed rates.

Cons:

• Limited choice of lenders.
• The variable rate charged is often higher than a basic variable rate loan.
• Variable component traditionally operates as a basic variable loan for most lenders.
• The capped rate is usually higher than the fixed rate for the equivalent fixed rate term.
• Has many of the fixed rate handicaps including rate cap fees and limitation to extra payments without penalty.

Introductory Rate Home Loan

The interest rate is usually low to attract borrowers. Also known as a honeymoon rate, this rate generally lasts only for or short term before it jumps up to a much higher variable rate (often Standard Variable). Rate types vary between lenders as discounted variable, fixed or capped.

Pros:

• Usually the lowest available rates
• When payments are made at the introductory rate, the principal can be reduced quickly
• Some lenders also include an offset account
• Payments usually increase sharply after the introductory period
• Most operate as basic variable loans only you wind up paying Standard Variable Rates
• Can compromise your access to packaged banking discounts
• Many come with early payout penalties.
• Wide variation in introductory terms, reversion rates, introductory rates and establishment makes comparison quite difficult without the right tools and experience
• Introductory rates may start out cheap, but quickly become expensive in most cases

Cons:

Lines of credit

A Line of Credit is like a personal overdraft or very large credit card. Lines of credits are commonly used to raise funds for investment or personal use by providing cash up to set limit which remains in place for the full term of the loan.

Payments are made on an Interest Only basis for the full life of the loan where the Line of Credit is an evergreen facility.

Pros:

• Extremely flexible allowing you maximum access to equity
• Offers  similar flexibility to credit cards and over drafts at much lower, home loan interest
• Simplifies and centralises all repayments and maximises interest offset opportunities

Cons:

• May attract a small interest rate loading (usually around 0.05%)
• You need to be disciplined to make sure you are actually paying your loan off or managing it to your own financial goals
• Can be very dangerous for inexperienced borrowers or borrowers without clear financial plans who regularly monitor their financial position

Non-conforming Home Loan

These loans are offered through non-bank lenders to people with poor credit ratings which may make it hard for them to obtain a home loan from a traditional lender. 

Although non-conforming lenders may be willing to overlook prior credit problems, they usually require stronger evidence of your ability to repay the loan.

Pros:

• Lenders forgive poor credit history and rating
• Higher interest rate than banks and more traditional lenders
• Loans mostly operate like a limited basic variable loan
• Low deposits options are more expensive again
• Entry and exit costs are high

Cons:

Remember, this is only a brief overview of some options available in the Australian mortgage market place. Features of each loan, including the amount borrowers will lend you, per use fees and important functionality varies between  lenders.

Limtied deals, special rates and limited offers come and go almost every day so when you are ready to find a home loan with someone you can trust, talk to a professional.

Request a free appointment – No charge, no obligation and with the comfort of a time and place that suits you. You can also call us on 1300 55 81 61.

These two loans have identical features, from different lenders. Which is cheaper for the average borrower?Answer: Loan B is several thousand dollars more expensive than Loan A.

The False Impression

All rates quoted on this site are based on a term of 30 years and a loan amount of $350,000, which is around average for most new borrowers. Mandatory Comparison Rates, are not.

Changes in loan amounts or loan terms dramatically influence the reliability of Comparison Rates. It is crucial you obtain a Comparison Rate for your individual situation. For the above example:

Although these two loans have the same comparison rate using a term and loan amount commonly quoted for Comparison Rates, when you increase the loan term and loan amount, Loan A becomes significantly cheaper. Although the percentage may seem like a small number it will add up to thousands of dollars difference.

Lenders and brokers are not required to provide you with a Comparison Rate based on your individual situation, however you should insist on one. If they refuse, then they simply don’t want you to be able to compare them apple to apple with lenders or brokers that will.

The Comparison Rate Formula.

Only ‘Ascertainable’ costs are included

This is a loophole which affects all borrowers, but none more significantly than borrowers who required Lenders Mortgage Insurance. Whether Lenders Mortgage Insurance is payable and how much it will cost varies wildly between lenders.

By how much? Who knows. It’s not unreasonable to see variations of $5,000+ on very ordinary loan amounts.

Does not consider features

You should always make sure the loans you are comparing have the features that you want and use. Once you have confirmed this, an individual Comparison Rate can then help you decide which is the most cost effective solution to meet your needs.

No good for Evergreen Interest Only

The Comparison Rate formula cannot be used for evergreen interest only facilities as the effective rate can only be calculated if the loan is repaid over time.

Fixed Rate Mortgage Traps

Comparison Rates can also be misleading for Fixed Rate loans as the majority of the the loan (for the purposes of calculating the Comparison Rate) is calculated at the variable rate. This means it is possible for one mortgage to have a lower fixed rate for the fixed rate period than another, yet have a higher Comparison Rate.

Look after the pennies and the dollars will look after themselves.
J. Paul Getty

Other factors

Higher interest rates nibble your lifestyle, every day.

Whenever you compare two interest rates, the higher rate means you must make higher repayments, which means you have less money to either pay your loan out faster or live the way you want.

Mortgage brokers often claim to work for FREE because the work they do is paid for by the lender. This is called commission and we share as much of it with you as possible. (Think thousands of dollars, not hundreds).

Borrowers who have used other mortgage brokers tell us our service is the best they have experienced. They are simply stunned that we share so much of our commission. We do it, because as time has proven, we can.

The two most generous options

Mates Rates Mortgage Brokers offers all our clients a choice between the two most generous mortgage rebates available in Australia. We know, because in 2002 we invented Ongoing Rebate Payments which is where we pay ongoing commissions into your pocket. 100% of ongoing commissions and you can’t get more generous than that.

However in response to requests from some borrowers we also introduced  a Single Rebate Payment so now there are two rebate payment options you can choose to receive regardless of what loan features, which product, what loan amount or which lender that best meets your needs from our superwide lender panel.

1. Ongoing Rebate Payments or ORP happen over time and take longer to accumulate
2. Single Rebate Payments or SRP’s happen faster and unlike any other broker, have no strings attached

Add to that, full time, professional mortgage broker help, our exclusive satisfaction guarantee and an established reputation for simplicity, support and savings and you have a recipe for a better mortgage solution at wholesale prices.

A Mates Rates mortgage broker helps you understand and choose the right mortgage for your needs more quickly and confidently than going it alone.  Mates Rates does not charge you a fee and with the added bonus of mortgage rebates, gives you access a range of 3 Star plus home loans for much less than anyone else.

Arrange a free, no obligation discussion with a mortgage professional online or by calling 1300 55 81 61, or read on to learn about the different types and advantages of different offset facilities.

Before reading this Offset Accounts vs Redraw vs All in one, you should read our Offset tutorial to ensure you have an understanding of how offset works.

Fact:

If you don’t make extra repayments (payments above the minimum repayments) and you don’t have offset features, you will take the full term of your mortgage to pay it off. Used properly, these interest saving features can save you thousands in interest and wipe years of debt from your mortgage.

Whilst it is true that offset facilities and extra repayments can have a dramatic effect on the amount of interest you pay and the time it takes to repay your mortgage, be wary of any person suggesting that you will repay your mortgage in 15 years or less without increasing your repayments by at least 30%.

The three main offset features available on mortgages in Australia are extra payments/redraw; offset accounts and all-in-ones. If you don’t want to spend the next 30 years repaying your mortgage, you must take a moment to understand each of these features and develop and implement a solution that works for you.

Extra repayments and redraw only

Most variable home loans allow you to make extra repayments and redraw (the ability to withdraw your extra repayments if you need to). This is the most basic interest saving feature available. Money is deposited into your mortgage either by salary crediting or by transferring money from a bank account. To redraw, the reverse is done and you transfer money from your mortgage to your bank account, usually via internet or telephone banking.

Advantages:

The main advantage is the clumsiness associated with this type of facility.

You cannot access your extra repayments quickly or directly. The temptation of withdrawing money via ATM or EFTPOS doesn’t exist as you can’t do it. Even if your bank account and mortgage are with the same institution, redraw usually requires internet or telephone access to transfer the money, although some require a faxed confirmation from you as well!

Once you initiate a redraw, the money stops offsetting your mortgage interest and enters limbo for up to 48 hours before it arrives in the account where you can access it. Consequently, you are discouraged from redrawing extra repayments on a regular basis and these funds are left where they are probably doing the most good – reducing the interest you pay and the time taken to repay your mortgage.

Disadvantage

The main disadvantage is the clumsiness associated with this type of facility.

Even in the most streamlined redraw arrangement can result in funds in limbo each time you deposit or redraw. Time spent in limbo = money that you haven’t saved in interest. Worse still, the challenges in accessing redraw can discourage you from depositing as much money as possible and moderates the funds that offset your mortgage.

Beware of

• Mortgages requiring a fax notification to activate redraw
• Redraw fees
• Limits and conditions on redraws
• Mortgages that do not allow direct salary crediting
• Lenders claiming this type of facility to be the same as an offset account or all-in-one
• Myths that claim offset accounts are a more expensive option
• Lenders not offering their own bank accounts to simplify transfers

Mortgage offset accounts

Mortgage offset accounts are every day banking accounts offered by your lender, which are separate to your actual loan account, but linked for the purposes of calculating the daily interest. A good mortgage offset account eliminates the need for you to have separate bank accounts, which reduces the cost to you in time and fees in managing these accounts.

Generally speaking, your mortgage offset account should be accessible via internet, telephone banking, EFTPOS and ATM. Some also offer cheque book and branch access. Which is the most important to you comes down to what suits you and how you see yourself using this account. A good mortgage offset account allows you to direct credit your salary, auto debit mortgage and credit card payments and bPay your bills.

Advantages

For most people, an offset account replaces the need for any other bank account, which simplifies management and reduces fees you would pay elsewhere in your budget. The main advantage is that every cent in your offset account is working to reduce the interest and time taken to pay off your mortgage. Every day, 24 hours a day.

A strategy by smart borrowers is to use their offset account as the main transaction account and arrange regular lump sums to be transferred from the offset or direct salary credited to their mortgage, which then acts as a savings account, as the extra money is out of sight, but not completely out of reach in case of emergency. Using this approach, both savings and money readily available in the offset account offset mortgage interest.

Disadvantages

There is a perception that you have to pay extra for an offset account, however when you compare similar quality lenders and mortgage products, this is untrue. Some basic variables offer 100% offset at no extra cost. If you are borrowing more than $250,000, packaging often results in the inclusion of an offset account and interest rates for full featured mortgages around or below those of reputable basic variables.

Beware of

• Limitations on accessing your offset account
• ATM and EFTPOS fees – although some lenders even waive foreign ATM costs
• Comparing a basic loan and forgetting regular banking costs that will be replaced by the offset account
• Lenders not offering offset accounts ‘educating’ you about offset accounts

All in one mortgages

All in one home loans are mortgages that also operate as everyday banking accounts. The two most common forms of these types of facilities are either Loan Transaction Accounts or Lines of Credit. Of these two, a line of credit is normally the most flexible and accessible, however there are some dangers and additional costs that may be associated with this type of mortgage. You should not take one out without first reading the line of credit tutorial.

The second type of all-in-one less commonly available is a Loan Transaction Account (LTA). This type of mortgage is a hybrid between an offset account and a mortgage where your loan account actually becomes your primary banking account.

Important: At least one major lender has limitations on their offset account that may render it ineffective. You may be recommended a split loan with a small line of credit to overcome these limitations when dealing with this lender or lenders like them. In these cases, keep your line of credit split as small as possible. It should be no more than $20,000 unless you have specific reasons for a higher limit.

Advantages

Like a mortgage offset account, an all-in-one replaces the need for any other bank account.

Disadvantages

The main disadvantage to an all-in-one mortgage is the combination of transactions, savings and debt into a single account can make it very difficult to budget or easily monitor the effectiveness of this strategy or your ability to save. Unlike a mortgage offset account, you cannot quarantine savings into your mortgage.

Lines of credit also have their own risks and many people who take out a line of credit for all of their borrowings do not make any progress on repaying their mortgage at all, let alone faster.

Loan transaction accounts may also have limitations that prevent scheduled payments and transfers and similar transactions that are more readily available from offset accounts.

Beware of

• Access fees
• Free transaction limits (such as 5 per month etc)
• Restrictions on bill payment and transfer scheduling
• Debt reduction salespeople who suggest repayment of your mortgage in 15 years or less
• All-in-ones being passed off as being the same as or better than mortgage offset accounts

Related mortgage topics. See also :

• Interest Only
• Line of credit
• Mortgage resources and Learning Centre

Offset is how repayments, extra payments and other interest reducer features affect the interest calculation and overall cost of your mortgage. Contrary to popular belief, offset is not a feature, but a characteristic of a loan. Although offset is a little complex to understand, it is a crucial characteristic if you wish to accelerate your mortgage and repay in less time with less money.

Most mortgage lenders calculate interest on daily balances, but only charge it monthly. This means if you change the balance of your loan on any day by making an extra payment, the interest calculated for that day will be lower than the lender predicted when they estimated your minimum repayments. This reduction in the interest calculation is called ‘offset’ because the extra money has ‘offset’ the loan balance for the purpose of interest calculation. Most lenders, although not all will pass the savings from this interest reduction on to you.

Offset becomes relevant if your mortgage is an all in one or offers interest saving features such as accepting extra payments or other interest saving facilities such as ‘offset accounts’. When used properly, these features will reduce the interest you will pay and the time it takes to repay your home loan.

How offset shortens your mortgage

Although offset will reduce the interest you pay on both principal and interest mortgages and interest only mortgages, offset will usually only shorten the length of your mortgage if you are already paying principal and interest. This is how it works.

When you take out a mortgage, your lender calculates a Minimum Repayment that you are required to make as a part of your loan contract. Your Minimum Repayments are based on four key variables.

1. Loan Balance
2. How often you will make repayments (also called repayment frequency)
3. Interest rate
4. Your specified loan term

Each of these factors is called an assumption as the lender assumes a value to enable them to calculate your Minimum Repayment. From these assumptions each Minimum Repayment has an assumed principal component and an assumed interest component. The interest component is based on your interest rate and assumed daily Loan Balances. So each Minimum Repayment will be made up of two parts and is best thought of as:

Minimum Repayment = Interest + Some Principal

Where Interest is the charge the lender makes for lending you the money and Some Principal is an amount of money that goes towards reducing the amount of money that you owe (your Loan Balance).

If your actual Loan Balance is less than the assumed Loan Balance when your Minimum Repayment was calculated, then the amount of interest due will also be less however your Minimum Repayment will remain the same. As a result, the part of the your Minimum Repayment that was assumed as, but not charged as Interest goes towards Some Principal and reduces your Loan Balance. This then creates a reduced Loan Balance for all subsequent Interest calculations and the savings begin to snowball. What starts out as a modest saving builds up speed an power over time.

Small, regular deposits can wipe years off your mortgage and save you tens of thousands in interest.

Offset – the nett of tax advantage

For personal borrowers, using your savings to offset the balances of your mortgage is far more effective than having those same funds deposited in even a high interest savings account. The reason for this is two fold.

The first and most obvious reason is the rate of interest you are charged on your mortgage is usually higher than the rate of interests earned from banks and other most ’safe and accessible’ savings accounts. As an example, if the interest charged on your mortgage is say 9%, you will probably earn around 7% for funds in a high interest savings account. As a result, your gross advantage of having money offsetting your mortgage would be around 2% over interest earned from the savings account. ie. money offsetting your mortgage means you are not paying 9% rather than earning 7% from a high interest savings account.

The second, and sometimes less obvious benefit is that income earned is taxed, whereas expenses you avoid, are not. Most people, need to read that sentence twice, so here it is again. Income earned is taxed, whereas expenses you avoid, are not.

This means that if your savings earn interest of 7%, you will be required to pay tax on those savings. If your marginal tax rate is say 30%, you will be required to pay tax of 30% x 7%, or 2.1%. This means your nett of tax advantage for those invested savings is 7% – 2.1% or 4.9%.

Compare this to saving 9% in mortgage interest for having those funds in offset instead which results in you avoiding an expense of 9%. Your nett of tax advantage is 9% in offset versus earning 4.9% interest, which is a substantial difference.

However the nett of tax advantage only applies if the borrowings are for personal use. Investment borrowings do not get the same advantage because the interest on investment debt is tax deductible. So whilst you will get a slightly better return because you avoid paying a higher rate than you would otherwise earn, there is no real tax saving.

Partial Offset

Partial offset is an offset feature where only a portion of your extra funds offset interest calculation for that day. For example, a partial offset of 40% will only offset interest calculations by $4,000 when you have extra funds of $10,000 in your offset facility or mortgage. Although this type of feature is most common amongst fixed rate loans, some lenders sneak it into their variable rate loans as well. If you want to get the most from your offset facilities, make sure they are 100% offset, regardless of which type offset feature you choose.

Different types of offset features

Different mortgages have a range of features that are often clustered together by lenders as ‘offset’, however these features operate differently and can result in starkly different outcomes.
If you are interested in interest offset options you should also read
the offset account vs redraw vs all-in-one tutorial.

Extra payments and redraw

Available on most loans and commonly passed off by sneaky lenders as ‘offset’ to beef up the appeal of their ‘cheap’ mortgage. Money can be deposited into the loan from another account and when redrawn, must be transferred to another account to access those funds.

Offset account

An offset account is an account that is separate to your mortgage that you can use for everyday banking like depositing your pay, growing your savings and paying your bills. Although the offset account is separate to your mortgage with separate statements, access and balances, the daily credit balance of the account offset the debit balance of your mortgage for the purpose of calculating interest.

All-in-one

There are a couple of different types of all-in-one mortgages available, however the offset and access benefits are a combination of the extra payment/redraw feature and the offset account feature. Your every day banking is done directly from
your home loan. Be careful of the ‘cheap’ version of these loans as lenders will promote the mortgage as ‘fee free’, but then charge you each time you access deposits. Small regular charges can really add up.

Beware of

Mortgages that do not allow additional payments. If a mortgage does not allow additional payments, you will have no choice to pay it off over the full term. If mortgage allows extra repayments, check that offset applies and it commences on the day you make your extra payment.

You should also beware of Lenders who describe offset as a special feature of a mortgage as all good quality mortgages offset additional payments. The term ‘offset’ is often used by lenders to describe different mortgage features in an attempt to make inferior products sound better and the benefits and disadvantages are fully explained in the features section mortgage tutorials which you can find here.

Related mortgage topics. See also :

• Offset account vs redraw vs all-in-one
• Mortgage resources and Learning Centre

Principal and interest (sometimes called P&I), like interest only, is not so much a mortgage type, but a repayment option. Principal and Interest is the most cost effective repayment option unless you are financially disciplined and will make regular, extra repayments, or have a specific investment strategy that requires interest only. A principal and interest repayment creates slightly higher repayment commitments, but significantly reduces your overall interest costs. When you borrow money, there are three parts to the repayment of that loan::

1. Principal (the money that you originally borrowed)
2. Interest
3. Fees and Charges (most lenders bill these charges separate to each repayment)

If you have not established your repayments on a principal and interest basis, you are not actually repaying your loan unless you make extra, manual payments.

Principal and Interest Terms (duration)

Principal and interest loan terms are standard, ranging from 5 years up to 40 years.

Advantages

The key advantage is that principal and interest repayments force you to repay your loan and this will lower your overall interest cost. Extra repayments and offset facilities will work more effectively for a principal and interest loan.

Disadvantages

The main disadvantage of a principal and interest repayment structure is your repayments are slightly higher than taking an interest only option.

Beware of

Colourful characters who try to convince you to take interest only because it costs you less. It is true principal and interest has slightly higher repayments, but you pay far less interest as you are actually paying your loan off.

Pricing

Pricing is standard, there is no extra loading for principal and interest mortgages.

Popularity

In Australia interest only mortgages are generally less popular than principal and interest mortgages.

Related mortgage topics. See also :

• Interest Only
• Line of credit
• Mortgage resources and Learning Centre

Interest only is not so much a particular mortgage type, but a repayment option. Although many lenders and some mortgage brokers will talk with you about a special interest only mortgage, the reality is that most quality loans, from basic home loans to the most flexible mortgage with all the bells and whistles will offer interest only as a feature. When you borrow money, there are three parts to the repayment of that loan:

1. Principal (the money that you originally borrowed)
2. Interest
3. Fees and Charges (most lenders bill these charges separate to each repayment)

Repayments based on interest only do not include a component of principal as they would for a more traditional principal and interest mortgage. This has a threefold effect.

• Your minimum monthly repayments during the interest only period are lower.
• You do not reduce your original mortgage balance unless you make extra repayments.
• When you start repaying the mortgage, your repayments will be significantly higher.
• You will pay more interest across the life of your loan, unless you make extra repayments.

Like many other mortgage features and types, an interest only mortgage comes from a commercial lending history and is now readily available for residential mortgage lending

Interest Only Terms (duration)

There are two types of interest only terms. The first is a limited interest only period, which is generally between 1 and 5 years, however some lenders will allow you to take an interest only repayment term for up to 10 years. Mortgages with a limited interest only period, usually revert to principal and interest automatically at the end of the interest only period. Some lenders will grant a further interest only period. However you should be mindful that the longer you take an interest only period, the shorter the period you will have to repay the principal. This can produce a dramatic increase in the minimum repayment.

The second type of interest only is an evergreen facility. This type of repayment remains interest only for the life of the loan, at the end of which, you will be required to repay the outstanding principal in a single balloon payment. The principal balloon is usually repaid by either refinancing or selling the property. This facility is most commonly offered as a line of credit mortgage.

Advantages

There is only one real advantage to an interest only repayment option. As the repayment is lower, it increases the amount of short term disposable cash you have for other purposes after making your monthly loan repayment.

Disadvantages

There are several disadvantages to interest only mortgages. The first and often most significant is that most people pay only the minimum repayment obligation. For these people, the amount owed does not reduce and the amount of interest paid as a result is significantly higher. People who are most likely to take out an interest only option are people with investment based debt who prefer to use money ordinarily dedicated to repaying principal, for some other purpose.

The second disadvantage is that at some stage the interest only option will end and you will be facing a shortened period to repay the principal, which may force you into refinancing your loan or selling your property.

Beware of

Mortgage brokers or lending consultants that suggest an interest only mortgage when you do not have any specific use for the extra short term disposable cash. As this type of mortgage delays the repayment of the principal, both lenders and mortgage brokers alike make more money than they do on a principal and interest loan.

Pricing

Interest only mortgages attract the same rate their principal and interest counterparts except in the case of a line of credit which can attract a rate loading of around 0.05% for some lenders. Lines of credit also have other limitations that may affect their suitability.

Popularity

In Australia interest only mortgages are generally less popular than principal and interest mortgages.

Related mortgage topics. See also :

• Principal and Interest
• Mortgage resources and Learning Centre

A line of credit is similar to a big credit card, except it is an evergreen Interest only facility, so that you do not have to repay the principal during the life of the loan. If you take out a line of credit, you can draw on any available funds up to your maximum limit at any time. You can then repay, borrow again whenever you want, up to the limit without needing to re-apply for credit.

Interest Only Terms (duration) and Special Provisions

Lines of credit mortgages have usually have a maximum term of 25 years. The Loan to Valuation Ratio (LVR) is also more limited and you will generally need a 20% deposit for a line of credit.

Advantages

Lines of credit inherit the advantage associated with an interest only repayment option. As the repayment is lower, it increases the amount of short term disposable cash you have after making your monthly loan repayment.

Another advantage is you have ready access to your equity which can make them a simple replacement for a construction loan. Other people that are likely to take out a line of credit mortgage include investors such as share traders and business owners that need regular and fast access to credit.

Disadvantages

As with the advantages, a line of credit also inherits the disadvantages of interest only mortgages. In addition, you will require a larger equity stake which may restrict your borrowing capacity. Another disadvantage of this type of facility is it often includes an annual review clause and lenders may choose to terminate your facility before the full term has expired.

Beware of

Debt reduction spruikers and mortgage brokers or lending consultants that suggest a line of credit will help you repay your mortgage off in a much shorter period of time. There are a range of interest saving products such as offset facilities that will usually achieve the same or better outcome at a lower cost. As this type of mortgage delays the repayment of the principal, both lenders and mortgage brokers alike make more money than they do on a principal and interest loan with offset facilities.

Pricing

Line of credit mortgages can attract a rate loading of around 0.05% for some lenders.

Popularity

Popularity of line of credit mortgages in Australia is inflated by misrepresentation of the benefits of the line of credit by debt reduction spruikers and their friends.

A line of credit may also be known as an equity line of credit, revolving line of credit, equity access, line of credit line, home equity loans, and an all-in-one home loan.

Related mortgage topics. See also :

• Offset account vs redraw vs all-in-one
• Interest Only
• Mortgage resources and Learning Centre

Ongoing Rebate Payments (ORP) is money we pay to your loan from Ongoing Commission we receive from your lender for brokering your mortgage.

When and how much?

ORP’s are smaller payments paid monthly for the life of your mortgage. ORP’s are 100% of the entire Ongoing (sometimes called Trail Commission received by Mates Rates.

It includes any special discounts or bonuses that affect the Upfront Commission paid by your lender to Mates Rates for your loan.

I am currently paying 5.10% interest, but with the Mates Rates Rebate of 0.30% I am effectively paying 4.8%.

Below are the rebates that I have had direct deposited into my offset account over the past 6 months thanks to Mates Rates generous rebate structure:

August $165.09, July $160.07,  June $165.40, May $149.39, April $165.30 March $165.20

I could not recommend Mates Rates Mortgages highly enough.

Darren

From little thing big things grow.

Although ORP payments start out a LOT smaller than an SRP, the can really add up over time, especially if you deposit them as extra payments to your mortgage. All ORP’s ares yours to keep, no matter what happens. Even if the lender initiates a “clawback”.

What’s clawback? It’s complex and it’s nasty. But don’t worry, at Mates Rates, it doesn’t affect you, because you keep your ORP no matter what.

Can I get an SRP and ORP?

Sorry, but we have to pay our staff because we need them to look after you. You can only choose one or the other.