When it comes to home loans, chances are you’ve heard a few terms thrown around — table loans, reducing loans, revolving credit and so on. But what’s the difference?
Table loans are the most common type of loan. Repayments are worked out in advance and, when used in conjunction with fixed rates, remain pretty much the same throughout a fixed period of time. If you’re on a floating interest rate however, your repayments can vary along with interest rate fluctuations. For this reason, table loans tend to work well for people who are on a regular income and prefer certainty in knowing how much their payments will be each month. It’s worth noting that based on an average fixed term of around 2.5 years, borrowers will likely refix 12 times over a 30 year mortgage.
They offer a degree of flexibility in that you can usually choose to pay a little extra on top of your usual repayments. In fact, this is a great idea as the extra comes straight off your principal, reducing interest costs, allowing you to pay off your home loan sooner. The specifics of your ability to pay extra (if at all) will be determined by the type of loan you choose, so be sure to check with your bank in advance.
Where table loans are great for regular incomes, revolving credit loans are more flexible and can work better for people whose income tends to be more sporadic.
They operate like a large overdraft where all your pay goes into the account, and all your bills and such come out of it up to a predetermined limit. Revolving credit loans require discipline to make them work to your advantage since there are no set repayments. For this reason, some people prefer to set a credit limit that gradually reduces over time.
In addition to offering great flexibility, because all your money goes into your loan account each payday, it’s acting as one big home loan repayment and as such can result in lower interest costs over time.
An offset loan works in much the same way as a table loan in that you have set repayments to make fortnightly or monthly. The cool part is in the way an offset loan also lets you save in interest costs by subtracting any money you have sitting in your accounts from the total amount owing on your loan. Because banks calculate interest daily, this means you’re paying interest on a smaller amount — even if the money is only in there for a day or two, it all counts. Each bank will operate an offset loan with slight differences, however, some will even let you group the accounts of your wider family to help offset an even larger amount.
An interest only loan isn’t a great long term option, and you wouldn’t want it to be — you’d never pay the home loan off. However, they can be a good short term choice if you need extra money in the hand right now.
They do this by letting you pay just the interest portion of your loan for a period of time and none of the principal. You’ll end up paying more interest in the long run, but they free up cash when you need it most. People typically switch back to a table loan once they’ve done what they need to with the interest only loan.
A less common type of loan is a reducing or ‘straight line’ loan. With these you’ll repay a constant amount of your principal each month/fortnight for the life of the loan — this is different from a table loan where the amount of principal paid starts off small and gets larger. While the interest portion of your payment starts off large, over time it decreases in a ‘straight line’ (hence the name). Sounds great, right? Well, yes, however, the downside is that because the total monthly repayment starts off much higher, it makes this type of loan unaffordable for most first home buyers.
Talk to the experts
Picking the right loan type can be tricky for old hands let alone first home buyers, so make the most of the expertise on offer at your bank and talk to them to find out which loan type — or mix of different loan types — is best suited to how you like to operate your money. Not all banks offer the same range of products, and they may vary from bank to bank, so be sure to do your homework when choosing what’s right for you.