The right home loan is the one that fits how your life and income are likely to change, not the one with the most features. For most owner occupiers, that comes down to three choices: how the rate behaves, how you repay, and whether you want money sitting beside the loan.
If you are buying in Spring Hill or elsewhere in Brisbane, flexibility is worth thinking about early.
Variable Rate or Fixed Rate: Which Suits You?
A variable rate moves when your lender changes its rate, while a fixed rate stays the same for an agreed period. Variable suits people who want flexibility to make extra repayments. Fixed suits people who want certainty for a set time.
The trade-off is real on both sides. With a variable rate, your repayments can rise. With a fixed rate, extra repayments are often capped, and leaving the loan early can trigger break costs. Lenders set these rules differently, so ask about them before you apply.
A split loan sits between the two. You divide the loan amount into a fixed part and a variable part. The cost is added complexity, because you manage two balances with different rules.
If you already have a fixed loan that is ending, our fixed rate expiry page explains your choices.
How Does a Linked Offset Account Work?
An offset account is a transaction account linked to your home loan. The balance in it is subtracted from your loan balance when interest is worked out, so you pay interest on a smaller amount.
As an example, consider a buyer with a loan of $600,000 and $30,000 sitting in a linked offset. Interest is charged as if the loan were $570,000. At the illustrative rate of 6.75% p.a., that is about $38,475 a year in interest on $570,000, compared with about $40,500 a year on $600,000. That is a difference of roughly $2,025 a year on this one sum, before allowing for repayments reducing the balance, and the buyer can still withdraw the money when needed. The figures are illustrative only.
The trade-off is that loans with offset accounts can carry higher fees or a slightly higher rate than basic loans. An offset only pays off if you keep a meaningful balance in it, so a loan with no offset may suit you better if you spend most of your pay.
Principal and Interest or Interest Only: What Changes?
With principal and interest repayments, you pay down the loan and cover the interest. With interest only, you pay just the interest for a set period, so the loan balance does not fall.
Interest only lowers repayments for a time. The cost is that you owe the same amount at the end of that period, and repayments then rise because you must repay the whole balance over a shorter remaining term. For most owner occupiers, principal and interest is the usual choice because it builds equity steadily.
To see how your repayments could look, use our loan repayments calculator.
What Does Your Deposit Mean for Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is a one-off cost that lenders often charge when your deposit is small compared to the property value. That relationship is called the loan to value ratio (LVR).
LMI protects the lender, not you. It can usually be added to the loan, but then you pay interest on it too. Whether it applies, and how much it costs, depends on your lender and your deposit. A broker can compare how different lenders treat the same deposit, which can change the outcome.
Pre-Approval and Borrowing Capacity: Where to Start
Pre-approval is a lender's conditional indication of how much it may lend you, so you can shop with a clear budget. It is not a final approval, and it can change if your finances or the property change.
Your borrowing capacity depends on your income, debts, living costs and the lender's rules. Lenders assess these differently, so one may lend more than another for the same person. Reducing credit card limits and unused debts before you apply can help.
A Scenario: Two Buyers, Same Income, Different Loans
Consider a couple buying a Brisbane apartment who expect a baby in two years. They plan to drop to one income for a while. Their situation is a loan that must stay manageable on less pay.
They choose a principal and interest loan with a variable rate and a linked offset. They keep their savings in the offset. The structure lets them make extra repayments while both are working. An offset does not change the minimum repayment, so that amount stays the same when income drops. They can only pay less if they are ahead on repayments and the lender allows it, or if the lender agrees to a change. Before they apply, they should ask the lender how it will assess the loan if one income is going to drop. The cost to watch is the offset fee, which they weigh against the interest it saves.
This is an illustration only. Your own plans, lender rules and fees will shape the right answer.
Checking Your Loan After You Settle
A loan that suited you at settlement may not suit you in a few years. Your income, family and property plans change, and lenders change their offers. A review lets you check the rate, features and fees against what is available now.
Our loan health check is a good place to start. If a review shows a better fit elsewhere, refinancing may be an option, though it can involve exit and set-up costs that you should weigh up first.
Lead Finance can access home loan options from a panel of lenders. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
What is a linked offset account?
It is a transaction account linked to your home loan. The balance is subtracted from your loan balance when interest is calculated, so you pay interest on less.
When does a fixed rate suit a home loan?
A fixed rate suits you if you want repayment certainty for a set period. The trade-off is that extra repayments are often limited and break costs may apply if you leave early.
What is interest only on a home loan?
Interest only means you pay just the interest for a set period, so the balance does not fall. Repayments then rise because the full balance must be repaid over a shorter remaining term.
Does a small deposit mean I pay Lenders Mortgage Insurance?
Often, yes. Lenders commonly charge LMI when the deposit is small compared to the property value, but it depends on the lender and your deposit.
