The three core structures behind most home loans — fixed rate, variable rate and line of credit — with the trade-offs of each laid out clearly.
A fixed-rate mortgage has a fixed interest rate for the entire term of the loan. The distinguishing factor is that the rate for every period is known at the time the mortgage is originated. The fixed period can vary, but you can usually lock in repayments for between one and five years. Although the fixed period may be three years, the total loan term may be 25 or 30 years. At the end of the fixed period you can decide whether to fix again at current market rates or convert to a variable rate for the remaining term.
A home loan in which the interest rate is not fixed. The rate moves up or down in line with movements in market interest rates. Basic variable loans generally have fewer features than a standard variable loan and suit borrowers looking to pay off a consistent amount over the full term — but they're less suited to paying a mortgage off quickly.
An agreement between a bank and a company or individual to provide a set amount of credit on demand. The borrower is under no obligation to draw down at any particular time, but may take part of the funds at any point over several years. These products can be a creative way to raise funds for investment, providing cash up to a pre-arranged limit. As long as more cash comes in than goes out, the account can work well — but it can become costly if the balance isn't regularly reduced, since it requires at least an interest-only payment each month.
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