In Australia, there are a number of ways to structure your home loan repayments. Although getting the cheapest rate is always important, you should also consider which of these structures better suits your needs.
VARIABLE RATE LOANS
Variable interest rate loans are all about flexibility and are also preferred if you expect interest rates may drop in the future.
Variable Rate loans allow you to:
- Repay your loan sooner and with less total interest when matched with an Offset Account.
- Make additional repayments
- Make Lump Sum reductions
- Change banks without penalty, keeping your options open
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 month-to-month. If the interest rate drops, then your repayments may drop as well. However, in the event of an interest rate rise, your repayments could also 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 interest you have to pay, and the compounding affect this has over 30 years is a considerable saving.
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 choice is usually 2 and 3 year fixed terms, 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 of a drop in interest rates, being locked into a fixed rate may mean your repayments are higher than they otherwise would be.
Other important differences to consider are:thousands of dollars in fees.
- You cannot offset cash in offset savings accounts on fixed rates (there are some exceptions)
- You cannot make additional repayments to your loan, without penalty
- It’s also worth noting that breaking a fixed rate loan can potentially cost thousands of dollars in fees.
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 or the ability to offset cash savings as well (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.
SO WHAT IS BEST FOR YOU?
Choosing the right kind of loan depends on your personal situation, earning capacity and long-term goals for your property. Speaking with a mortgage broker is essential to figure out the best way forward for you and could help you save money along the way.
Contact the team at Byfields Finance Solutions to organise a time to catch up and discuss what is the best option for you.
Director – B.Bus, Dip.FMBM
(08) 9416 2222