Standard Variable Interest Rate Loan

This type of loan is by far the most common among Australian borrowers. The interest rate is subject to market forces and can therefore go up or down. However, with a standard variable interest rate you have more flexibility than a fixed rate. This means that you can usually pay unlimited extra amounts without penalty, redraw excess repayments, fix all or part of the loan at any time and repay the loan in full at any time without penalty. Standard variable loans are offered by both bank and non-bank lenders.

Basic Variable Interest Rate Loan

Many lenders, particularly the banks (so they can compete with non-bank lenders standard variable products) now offer a "basic" variable loan with lower rates than standard variable loans. These loans are generally "no frills" loans and do not have the features of their standard variable rate cousins. They are suited to people on a tight budget who do not want the frills and will therefore not require features like redraw, lump sum payments, portability, etc. A word of caution here. Most of these loans do not allow you to fix the interest rate without incurring a significant fee. So, if interest rates rise and you wish to fix, any savings from being on the lower rate may be lost in the switching fee. There may also be penalties if you repay, or discharge the loan early.

Fixed Interest Rate Loan

A fixed interest rate loan allows you to fix the interest rate for a period of time, generally between one and five years, but with some lenders seven, ten and even fifteen years. After the fixed term the loan usually reverts to the then standard variable rate or you may choose to re-fix the loan for another term.

One advantage of these types of loans is the certainty of the monthly payments during the fixed period as the interest rate will not vary. However, a major disadvantage is that a large number of lenders will not allow you to make extra repayments without incurring a penalty fee, or if they do allow extra payments there is a limit. Also, if you decide to sell your home whilst on a fixed interest rate a penalty will generally apply.

Fixed rates should only be considered in the following circumstances:

• There is a strong upward pressure on interest rates and you wish to protect yourself from possible rate increases.
• You require a fixed monthly commitment for personal budget reasons.
• You intend keeping the property for the full term of the fixed rate.

The Line of Credit Loan

These loans provide the ultimate in flexibility and, along with 100% offset loans are rapidly gaining favour with borrowers.

Your total income is deposited into the loan account thereby reducing balance. As interest is charged daily on the outstanding balance then while ever that money sits in the loan account the interest charge will be lower. The easiest way to understand how these accounts work is to look at them like a savings account in reverse. The balance is always negative and the closer to zero you get the better off you are. Generally, these loans are best suited to people who have excess disposable income each month.

Money to meet living expenses and bills can either be withdrawn directly from the account or, alternatively, paid for using a credit card with up to 55 days interest free. On the credit card statement due date the FULL amount is repaid by drawing the money from your Line of Credit account. In fact some Lenders will set up a direct debit authority to automatically pay the credit card balance in full automatically on the due date.

One major danger with these loans is if you cannot budget and effectively manage your money you could find yourself owing the same amount of money in 20 years time. Therefore it is important to ensure you plan a realistic budget and stick to it.

With all of the flexibility that these loans have comes the adage "You get what you pay for". The interest rates on these loans are usually on the higher side so this needs to be taken into account.

The benefits of this type of loan are:

• Flexibility to actively manage your finances the way you want.
• Can assist in repaying your loan in the shortest possible time utilising a disciplined debt reduction strategy.
• In most cases the facility has no term so you may need never apply for a loan again.
• Ideal for people who wish to borrow for investment and need flexibility.

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