Types of Interest Rates
This is an interest rate that does not change during a specified period. The specific period should be defined in the loan agreement.
This interest rate may vary during the term of a loan. There are a number of different types of variable loans (some of these are provided below)
Wholly variable rate
This interest rate may vary during the term of a loan at the discretion of the lender. The lender may not provide any guarantee that what the interest rate will be at any given time. Note that wholly variable interest rate of one lender may be higher or lower when compared to other lenders.
Standard variable rate
This interest rate may vary during the term of a loan at the discretion of the lender and is very similar to the wholly variable rate. This rate is often applied after the period of a discount interest rate has expired. Always compare the standard variable rates of different lenders to determine the appropriate market value of the rate a lender is offering.
Bank bill rate
This rate is set by the professional money market. There are many types of bank bill interest rates and you should make sure you understand the type of bank bill rate your are considering and compare to the same bank bill rate offered by other lenders.
Discount rates (Honeymoon rates)
These are usually low rates that commence for a limited period for a long term loan. For example a home loan may include a fixed low interest rate for the first twelve months then after that first 12 months convert to a variable interest rate. Remember to check the conditions of a discount rate offer as some lenders impose early repayment penalties to discourage borrowers from repaying their loan at the end of the discount rate period. Types of Loans
Principal and interest loans
These loans requirement repayments that include repayment of the principal (original amount borrowed) and the interest accrued. Remember to check that the repayments required are sufficient to repay the loan and interest within the period of the loan.
Interest only loans
An interest only loan requires only repayments to the interest accrued. An interest only loan does not pay off any of the principal of the original amount borrowed. To pay any of the principal amount borrowed additional special payments have to be made.
Split loans may apply different interest rates to different components of a loan. For example one part of the loan may have a fixed interest rate applied while the remainder of the same loan may have a variable interest rate or bank bill interest rate applied.
Home equity (redraw) loan
This is a loan borrowed from equity the borrower has built up in their property.
Things to Remember
- Always compare the rates and types of loans between a number of different lenders.
- Always consider your own personal circumstances to best select the type of rate and loan that will suit your needs.
- Always consider the fees and charges that a lender may apply to a specific interest rate and loan.
- Note if there are penalties for repaying a loan earlier than the loan period of the loan.
- Make sure you understand the terms of your loan. Ask the lender to explain any terms and conditions your don’t understand.