Variable loans are loans that are subject to interest rate fluctuations. Whenever your bank increases or decreases interest rates, you will end up either paying more or less for your loan, depending on what the bank has decided to do.

A typical owner-occupied mortgage is taken out over 25 or 30 years, although you can reduce the overall term by making higher or more frequent payments. Mortgages are either based on principal (the amount you borrowed from the bank) and interest (the amount you pay back for having borrowed that money) loan repayments, or interest-only repayments (generally available for 1-5 years for owner occupied loans and 1-10 years for investment loans) where none of the principal component of the loan is paid down.

Variable loan can be Discounted Variable, Basic Variable or Standard Variable:

These loans have discounted variable rates for a specific term, best used where the loan is only expected to be required for the short term. These products are generally not very good for long term loans because after the honeymoon period the interest rate reverts to the standard variable rate.

This is a no-frills product that is offered by most lenders. Normally, there aren’t many other features to speak of. Most basic variable loans offer redraw but at a higher cost. Again, many of these products may have other costs. The interest rate for these products is generally in the range of 0.50 per cent to 0.80 per cent below the standard variable rate. They suit “set and forget” style arrangements, where the clients hardly touch the loan account or need any other features.

Standard variable loans offer borrowers the most features. The only time we would recommend people use a standard variable product is within a professional package and thereby the interest rate would be discounted to be comparable with basic variable loans.

Offset accounts are normal loan account linked to a transaction account. Interest is calculated on the net balance between the loan account and the transaction account. That is, the transaction account balance is offset against the loan balance. For example, if your loan balance was $400,000 and your transaction account balance is $20,000, then you would be charged loan interest on a net balance of $380,000. These products are best used for owner-occupier (or home loan) debt. The reason for this is that you are better off to offset non-deductible debt with any free cash rather than deductible debt.

The interest is fixed for a specific period of time. You generally have the option to choose between a fixed rate period from one to five years, seven years and even 10 years. Normally fixed rate loans limit the amount of extra repayments you can make (normally limited to approximately $10,000 per year). This loan is popular among borrowers who want to ensure their repayments don’t rise.

You can take out a mortgage with one portion of the loan variable, and the other fixed. In many ways, this offers the best of both worlds and you have the flexibility to repay more on the variable loan and reduce risk through the fixed loan.

Mortgage lenders require you to provide evidence of your ability to meet loan repayments, but this can be a problem for non-salaried workers such as the self-employed. Low-doc loans require less proof-of-income paperwork, but the interest rate levied is often higher than the standard variable rate.

They are the most flexible products available, but they are also generally the most expensive. The minimum repayment for lines of credit is interest only. Line of credit products are essentially a transaction account and a loan account rolled into one. 

These products are perfect for borrowers who frequently need tapping into equity in an existing home and drawing down funds as required for different purposes, such as renovations or for those who undertake small transactions. Like a credit card, repayments are only made on the amount drawn down. 

Line-of-credit loans are often interest-only for a significant period but can revert to principal and interest repayments down the track. This is a way of most lenders charge extra for line of credit accounts, either through a facility fee, undrawn funds fees and/or a higher interest rate

These loans allow amounts of finance to be drawn down progressively to cover the various stages of a construction project. Repayments (generally only on interest for the first 12 months, then principal and interest thereafter) are only made on the amount of the loan facility that has been drawn down.

Bridging loans are designed as short-term financing options for borrowers who need funding to buy a new residence before selling their existing home. The interest rates on these loans are higher than the standard variable interest rate.

If you do not have genuine savings, there are alternative solutions available to you so you can break into the market.

During the interest-only period your repayments would be lower but would go up once you start paying off the principal component of the loan. This setup can have drawbacks, most notably the potentially greater long-term cost compared to P&I options.

Construction loans and Bridging Loans are often set up with IO repayments.