Knowledge Hub

Principal and Interest Loans

Most people get this type of home loan. You make regular repayments on the amount borrowed (the principal), plus you pay interest on that amount. You pay off the loan over an agreed period of time (loan term), for example, 25 or 30 years.

Interest-only Loans

For an initial period (normally between one to five years), your repayments only cover interest on the amount borrowed. You aren’t paying off the principal you borrowed, so your debt isn’t reduced. Repayments may be lower during the interest-only period, but they will go up after that. Make sure you can afford them.

Loan Terms

Your loan term is how long you have to pay off the loan. It impacts the size of your mortgage repayments and how much interest you’ll pay.

A shorter loan term (for example, 20 years) means higher repayments, but you’ll pay less in interest.

A longer loan term (for example, 30 years) means lower repayments, but you’ll pay more in interest.

Fixed Interest Rate

A fixed interest rate stays the same for a set period (for example, five years). The rate then goes to a variable interest rate, or you can negotiate another fixed rate.

Pros:

  • Makes budgeting easier as you know what your repayments will be.

  • Fewer loan features could cost you less.

Cons:

  • You won’t get the benefit if interest rates go down.

  • It may cost more to switch loans later, if you’re charged a break fee.

Variable Interest Rate

A variable interest rate can go up or down as the lending market changes (for example when official cash rates change).

Pros:

  • More loan features may offer you greater flexibility.

  • It’s usually easier to switch loans later, if you find a better deal.

Cons:

  • Makes budgeting harder as your repayments could go up or down.

  • More loan features could cost you more.

Partially-Fixed Rate

If you’re not sure whether a fixed or variable interest rate is right for you, consider a bit of both. With a partially-fixed rate (split loan), a portion of your loan has a fixed rate and the rest has a variable rate. You can decide how to split the loan (for example, 50/50 or 20/80).

Offset Account

An Offset Account is usually a transactional account linked to your home loan, the balance held in the account “offsets” the balance in your mortgage, helping to reduce the interest paid and overall term of the loan.

Key benefits of an offset account

  • Flexible and accessible

  • A typical offset account is essentially an everyday transactional account, so it’s very easy to deposit and withdraw your funds, especially when compared to a line of credit or redraw facility.

  • High interest “return” on your savings

  • Interest rates charged on home loans are usually higher than interest rates paid on everyday transactional accounts. So while you don’t receive interest on your savings in the offset account, the interest that you save on your home loan will typically outweigh potential interest gains.

  • Interest calculated daily

  • Interest is calculated daily, so whether you save regularly or live pay-to-pay, as soon as there are some savings in your offset account for more than one day at any point in time, you will benefit from the offset impact on your home loan.

  • Reducing your tax bill

  • Savings interest is taxable, but because your offset account balance is used to reduce your loan interest, no tax is payable, so you are effectively reducing your tax bill.

Redraw

A redraw facility is a home loan feature attached to your mortgage that gives you the opportunity to make extra repayments on your home loan. This helps reduce interest costs. You then have the option to “redraw” the extra funds paid into mortgage.