Mortgage types
There are a large number of different mortgage options on the market - all suited to different lifestyles and circumstances. It can be confusing understanding all the features of the different products and knowing which one to choose.
Principal and Interest mortgages
With a principal and interest mortgage your minimum monthly repayments cover both capital and interest on the loan, therefore with each payment made; your mortgage balance owing is reducing.
Interest only mortgages
With an interest only mortgage, your minimum monthly payments to the lender cover only the interest on the loan. At the end of the interest only period, the loan reverts to a principal and interest mortgage.
Example: If capital gain is your objective, you’ll more than likely want to look at borrowing on an interest only basis. This means that you can minimize the cost of owning your investment property and receive the full benefit of tax deductions.
Note: You can still make principal payments on an interest only mortgage during the interest only period, provided it is a variable rate.
Interest rate options
Once you've decided on whether you are going to make payments on the capital or not, you need to turn your mind to interest rate options. There are many different ways of calculating the interest due - all of which have their advantages and disadvantages, depending on your circumstances.
Standard variable rate
The simplest form of loan is one which sets its interest rate according to the lender's standard variable rate (floating). With a loan like this, your interest payments are likely to rise or fall every time there is a change in the Official Cash Rate, as determined by the Reserve Bank.
| Advantages | Disadvantages |
| You can make additional repayments as often as you like | Rates are often difficult to forecast |
| You are able to build your equity at a faster rate | Rates are subject to change |
| You can pay your loan off faster | |
| You can reduce the interest cost of your loan | |
| You can withdraw any additional payments you’ve made |
Discount rate
A discount mortgage offers a reduction ("discount") of a given amount on the lender's standard variable rate. If the variable rate changes, the rate you pay will fluctuate in line with the change but at the same level of discount (e.g. 0.5% below standard variable rate).
After the discount period finishes, the loan reverts in most cases to the lender's standard variable rate.
| Advantages | Disadvantages |
| You can make a significant saving on the standard variable rate | Discount mortgages often incorporate significant early repayment charges, which may make it expensive for you to remortgage to another rate or lender. |
Fixed rate
A fixed rate loan charges a set rate of interest for a predetermined period, and then usually reverts to the lender's standard variable rate. Fixed rate loans shield home owners from potential changes in the Official Cash Rate (OCR), as determined by the Reserve Bank.
| Advantages | Disadvantages |
| Your payments are set for a period of time | Often charged a penalty for making additional payments |
| Fixed rates are generally lower than variable rates | If rates fall, you remain locked into the higher rate until expiry date. Break costs can be expensive. |
| You are not impacted by any increase in rates | Cannot access redraw (additional repayments) |
Capped Rate
A capped rate will not rise above a certain level for the cap period - offering similar security to the fixed rate. You can have confidence that your interest rate will not exceed the cap, whatever happens to the lender's standard variable rate.
| Advantages | Disadvantages |
| You get the benefit of any drop in interest rates | As a payback for the security of the capped rate, rates are often higher than a fixed rate and the initial cap term seldom lasts longer than 1 year. |
| You are not impacted by any increase in rates |
