Home loans 101

Variable rates change over time based on the fluctuations of the financial market and lender pricing. If market interest rates rise, it’s highly likely your repayments will follow suit. On the flipside, if rates drop, chances are you’ll benefit as your repayments may go down.

Why choose variable?

• If market rates fall, your interest rate is likely to as well.
• Flexibility. Make extra repayments whenever you like to help pay off your loan sooner, without additional fees.
• If you have made extra repayments, you’ve probably built up what we call “available credit”. If you have, you can redraw those funds without paying fees (minimum redraw amount $100).

Drawbacks

• If interest rates rise, your repayments are likely to follow.
• Harder to budget for since your repayments may change month to month as the market changes.

Our variable rate UHomeLoans are suitable for buyers who need repayment flexibility and account features such as redraw.

Fixed rate loans lock-in (or fix) the interest rate you pay for a certain period of time (generally 1, 3 and 5-year terms). Once that period is over, you can choose to fix your rate again. If not, you’ll automatically switch over to a variable rate.

Why choose fixed?

• Stability. You’re protected against interest rate rises during the fixed rate period.
• Your repayments stay the same for a fixed period making it easier to budget.

Drawbacks

• Your rate is locked in – great if rates go up, but not so great if rates fall.
• You may get stuck paying ‘break costs’ if you repay your loan early, or want to pay off a bit extra, during your fixed period. That’s why, if you decide to go with a fixed rate, it’s really important to choose your fixed rate period carefully. (Note: With a UHomeLoan, you can pay $20,000 in additional repayments over the fixed term without incurring break costs).
• Redraw generally isn’t available.

Our fixed rate UHomeLoans are suitable for buyers looking to start off with a straight-forward, predictable and “easy to budget for” loan.

When you take out a fixed UHomeLoan, a fixed-rate fee of $395 is payable to guard against rate increases between formal loan approval and settlement (provided your loan settles within 3 months).

For those of you who want the best of both worlds!

A split loan allows you to divide your total loan amount loan into different buckets, each with a different rate type and/or repayment type. 

Here are some examples of why you might decide to split your loan:

• Hedge your bets – split your loan between fixed and variable portions. This can soften the overall impact of rate changes (up or down) and can still give you a fair degree of flexibility to make (and redraw) extra repayments.
• Own your home sooner – make extra payments on your variable split and you will reduce your loan balance.
• Lifestyle purposes – use the equity in your home to buy a car, renovate or go on a holiday.
• Record keeping for investors – split your loans by reference to your investments and you’ll get separate statements for each split.

Split loans are suitable for people who are looking to take advantage of the security of a fixed rate with the flexibility of a variable rate.

With a UHomeLoan you can have a up to four splits each with a minimum amount of $20,000.

Most home loans are what we call principal and interest loans. This means each repayment goes towards paying off both the initial amount you borrowed (the ‘principal’) and the interest amount.

Why choose principal and interest?

• You’ll actually be paying off your property with each payment. Emotionally, that can feel good but it also means that, over the life of your loan, you’ll end up paying less. Less debt means less interest, so your wallet may feel better too!
• Flexibility as you will have a broader range of repayment options – choose between weekly, fortnightly or monthly repayments.

Drawbacks

• Your initial monthly repayments will be higher than if you choose to pay interest only.
• Paying off some principal each month reduces the amount of interest you pay – something to think about if you’re an investor.
• Unless you’re paying off more than the minimum monthly principal and interest repayment required, you won’t have available funds to redraw.

Principal and interest loans are the most popular loan on the market, particularly for owner-occupiers, since they allow you to start paying off your mortgage much sooner.

Interest only means that, for an agreed period, you’ll only be paying off the interest due on your loan. Your repayments won’t reduce the balance (the ‘principal’) of your mortgage. Once the interest-only period ends, unless it’s extended, you have to start making principal and interest repayments.

The interest-only repayment option can only be applied for up to 10 years for investors, and a maximum of 5 years for owner-occupiers, during the life of your UHomeLoan.

Why choose interest only?

• Your repayment amount will be lower during the interest-only period (compared to making principal and interest repayments) so the earlier years of your home loan will be easier to manage.
• If you are an investor, you can maximise any available tax-deductible interest.
• During the interest-only period, you can choose to repay any principal and, if so, how much (but don’t forget to check if this would trigger break costs). If you ever want to redraw money from the extra repayments, you can – provided the option to redraw is available.

Drawbacks

• In the long run, it generally costs more. Interest is charged on the outstanding balance of your loan. So if you don’t reduce your loan by making principal payments, your interest charge will be higher.
• Throughout the interest-only period, unless you make additional payments, you’ll still owe the same amount as when you first took out your home loan.
• Your repayment options may be more restricted. When paying interest only on a UHomeLoan, you can only make monthly repayments.
• Some lenders will charge a higher rate of interest on interest-only loans.

Interest-only loans are popular among investors as they maximize any available interest deductions and can free up cash flow for other investments.

Looking for more info? Take a look at the UHomeLoan comparison table for more detail on the types of UHomeLoans UBank offers, their features and if there are any associated fees.