Fixed? Variable? Both? Making the right choice.
In Australia, there are a number of ways to structure your home loan repayments. Finding the best option may save you time and money on your mortgage. Here is some information to help you choose the repayment structure that works best for you.
Variable rate loans
Variable interest rate loans are all about flexibility. Essentially, with a variable rate loan, the interest rate moves up or down as the market moves. This means your loan repayments may also change during the term of the loan.
If the interest rate drops, then your repayments may drop as well. However, in the event of an interest rate rise, your repayments are likely to increase.
Many variable rate loans come with additional features, which can reduce the amount of interest paid over the life of the loan. For example, a variable rate loan with a 100% offset arrangement links your loan account to your savings account. Any funds held in your savings account are offset against the borrowed amount, reducing the amount of interest you have to pay.
Many variable rate loans offer flexibility in terms of increased payments, allowing you to pay off your loan faster if you have additional funds available. They also permit additional lump sum payments for the unexpected windfall.
Fixed rate loans
A fixed rate loan is one where the interest rate is fixed for a limited period, and immune from any movements in the market. The most popular choices are three and five-year fixed interest loans, although options ranging from one to ten years are available.
Fixed rate loans allow you to make steady, regular repayments. They’re great for borrowers on strict budgets, or if you’re entering into a mortgage at a time when interest rates are likely to rise.
In the event that interest rates are falling, being locked into a fixed rate may mean your repayments are higher than they otherwise would be. It’s also worth noting that breaking a fixed rate loan can potentially cost thousands of dollars in fees.
Additionally, there is limited capacity to make additional payments to a fixed rate loan. Many banks will charge you a fee for making extra payments (over and above their stated maximum) towards the loan during the period it has been fixed.
Split rate loans – a foot in each camp
A split rate loan is when you break your mortgage into two loans – one with a fixed rate and one with a variable rate.
It’s something of an ‘each-way bet’. A split loan offers borrowers protection from rate rises (with the fixed portion of the loan) alongside the advantage of rate drops (with the variable portion of the loan).
Most banks will allow you to split your loans from the outset, without having to pay for two separate loan applications.
Choosing the right kind of loan depends on your personal situation, earning capacity and long-term goals for your property.
Why not contact us to discuss which option works best for you. We can help you to figure out the best way forward, and could help you save money along the way.
Michael began his career in the finance industry over 35 years ago. He progressed through the ranks at the CBA in both retail and corporate lending, culminating in a senior position as a Corporate Relationship Executive. His decision to leave the bank in 2003 to become an independent mortgage broker was driven by his desire to assist everyday customers break through the jargon of the banking world and access the best loan products in the market. His experience is wide-ranging from helping first time buyers to large commercial enterprises. What Michael doesn’t know about home loans, simply isn’t worth knowing!