You’ve saved the deposit, done your homework and found the perfect home. Now it’s time to decide on a home loan. We offer our tips on how to select the best home loan for your needs.

With so many home loans to choose from, finding the perfect fit for your particular circumstances takes research and patience. Before you choose the specific loan type, or types, that suit your circumstances, it is worthwhile taking some time to investigate the different loan structures available, as this will impact on your choice of loan type.

There are four main types of loan structures to choose from, as well as fixed and variable interest rate options to consider.

Table loan (also known as principal and interest loan)
With a table loan, your repayments are set at the start of the loan (subject to rising or falling interest rates). Assuming interest rates did not change for the life of the loan, your repayment amount would remain unchanged. Each repayment pays back a portion of the principal amount of the original loan and the remainder pays the interest owing. Repayments are mainly interest at the start of the loan, gradually shifting to principal towards the end of the loan as the balance of the loan reduces. Repayments are spread evenly over the entire term of the loan. Fixed or variable rate options are available for table loans.

Reducing loan (also known as principal reducing loan)
With a reducing loan, each repayment contains an equal amount of the principal amount of the original loan as well as the regular interest charges. Because repayments include a fixed principal amount as well as interest, the total amount of principal you owe decreases more quickly over the life of the loan, resulting in a decrease in interest charges, and your payments reduce accordingly. This option is popular with borrowers who can pay a bit extra on their home loan from the start. Fixed or variable interest rates options are available for reducing loans.

Interest only loan
With this type of loan, only interest is paid during the interest only term and not any principal. At the end of the interest only term, the principal is then repaid as a lump sum, along with the final interest instalment, or you can opt to transfer to a table or reducing loan. Interest only loans provide short-term ‘bridging’ finance between buying one house and selling another or are suitable for customers who require smaller initial payments, for example if you are renovating your home immediately after purchase. They are also used by property investors who intend to sell a property within a short time (one to ten years) or are following a negative gearing strategy and wish to maximise tax-deductible expenses at the outset. Fixed or variable interest rates options are available for interest only loans.

Revolving line of credit loan
This loan works like a normal transaction account with a large overdraft limit. Your salary and other income are paid into the loan and you make deposits or withdrawals as needed as long as your loan balance remains under the agreed limit. While there are set interest repayments, you can choose when and how much principal you wish to pay off. You can withdraw funds from the loan up to an agreed limit for any reason, as long as interest charges and fees are also met within the agreed limit. Because of the flexibility this loan offers, it suits financially disciplined, experienced borrowers and those with high or irregular incomes. Revolving line of credit loans always have variable interest rates.

Fixed versus variable interest rate loans
Knowing whether to choose a fixed or variable interest rate loan is a matter of matching your financial circumstances, personal preference for repayment certainty and what you think is going to happen to interest rates with the options available. To help you make this choice, you need to understand the difference between a fixed and variable interest rate loan.

Fixed rate loan
A fixed interest rate means that the interest rate and your repayments will not change during the fixed rate term chosen. The fixed rate terms available generally range from six months to five years. At the end of the fixed rate term, you can choose to transfer to a further fixed rate term or a different loan type. A fixed rate provides repayment certainty and protection from interest rate increases during the fixed rate term, but remember if interest rates go down during the fixed rate term, you do not receive this benefit.

With a fixed rate loan you have limited flexibility to make extra repayments and a charge will usually apply if the loan is paid off in full during the fixed rate term. You can usually make some additional repayments up to a set level during the fixed rate term, but early repayment charges will apply if you pay more than this amount.

Variable rate loans
A variable interest rate means that the interest rates and your repayments will move up and down with movements in the interest rate market. This means that you do not have protection from interest rate increases, but you do receive the benefit of any interest rate decreases.

Variable rate loans provide more flexibility to make extra repayments or pay the loan off in full. Variable rate loans generally allow unrestricted additional or lump sum payments and most allow you to pay the loan off in full with no penalty. Some variable rate loans also allow you to redraw the additional or lump sum payments you have made over and above your regular scheduled minimum repayment for a small fee.

There are a variety of variable loan types available which offer some alternatives depending on your needs. The interest rate and charges vary for each depending on the amount of features offered, such as loan repayment holidays, redraw facilities and the ability to repay in full without charge.

When comparing interest rates, always compare loans with the same features. That way you’re comparing ‘apples’ with ‘apples’.

Which loan is right for you?
Understanding some of these differences in loan structures means you can now choose from the different loan types on offer with a greater understanding of the impact your choice will have. Below are a number of questions to consider to help you match a loan type and structure to your circumstances and personal preferences.

• How quickly do you plan to pay off the loan?
• Is your financial position likely to change (eg new baby, promotion, retirement)?
• How disciplined are you with money?
• How often do you get paid?
• Can your salary be deposited directly into your loan?
• Would you like to be able to re-borrow additional payments you have made into the loan (known as redraw)?
• Could you manage a line of credit facility?
• Do you prefer the certainty of locking in a set interest rate with set repayments for a specific time (fixed rate loan), or do you want the flexibility of a variable rate loan in which the interest rate you pay (and possibly your repayments) rises or falls in line with official rates?
• Do you plan to use the equity in your home for other investments?

Next steps
Once you understand the types of loans and structures available, you and your finance provider can begin putting together the loan that best suits your circumstances. Remember, you are not restricted to one particular loan type or structure for the entire life of your loan. You can split your loan among different loan types and structures. For example, you might have an interest only fixed interest rate loan in addition to a variable rate loan. Your finance provider can help you choose a loan structure that best suits your circumstances.

Learn more about ANZ’s Home Loan options