Fixed or Variable Rate home loan?
There are several different ways to set up your home loan repayments. I’ve provided some information below to assist you in choosing the repayment type that will work best for your situation.
Variable rate home loans
Variable interest rate home loans are the most flexible type of loan. With a variable rate mortgage, the interest rate will go up and down in line with market movements. This also means that the repayments on your loan may change over time.
If the interest rate goes down then your repayments (or your interest repayments) may also reduce. However – if the interest rate goes up then your repayments could also increase.
A lot of variable rate mortgages have additional features which can help you pay off your home loan quicker by reducing the amount of interest you pay. A typical example is a variable rate loan with a linked offset account. An offset account is essentially a savings account which is attached to your home loan. Any savings held in your offset account will reduce the interest you have to pay on your home loan.
For instance – let’s look at the following example. Andrew from Noosa has recently taken out a variable rate home loan with a linked offset account. He has a $200,000 home loan with $50,000 sitting in his offset account. Due to the savings in his offset account, Andrew only pays interest on $150,000 of his loan which means he’s able to pay off a larger portion of the loan principal – and pay off his home loan quicker.
Also – a lot of variable rate loans provide additional flexibility by allowing extra repayments which will help you pay off your loan quicker. They usually have redraw capability as well which enables you to access the additional repayments you’ve made.
Fixed rate home loans
A fixed rate home loan is one where the interest rate stays the same for a period of time – which means it won’t go up and down based on decisions from the Reserve Bank of Australia or other market movements. They usually range in duration from 1 to 5 years.
Fixed rates aren’t usually as flexible as variable rates. For instance – not many lenders will allow you to link up an offset account, make unlimited extra repayments or redraw from the loan. While this isn’t the case for every lender – it’s the general rule when it comes to fixed rate loans.
They can also be expensive loans to “break” if you decide to sell your property or refinance your loan during the fixed loan period.
Fixed rate loans can be great for those on a tight budget, want control over their monthly repayments or are concerned about the future of interest rate movements.
Splitting between variable and fixed – a combo setup
This is a common structure we set up for a lot of Pass Go clients. A split rate loan structure is when you have two loans set up against your property – once is variable and the other is fixed.
It provides you with the best of both worlds. You obtain the flexibility that comes with the variable loan as well as the certainty that comes with the fixed loan. It also means that you’re hedging your bets a little against rate movements. If rates go down – you’ll benefit from having the variable portion. If rates go up – you’ll benefit by having the fixed portion.
Setting up a variable/fixed split loan is commonly accepted by most banks and usually only costs the one loan application fee (if applicable).
When it comes to selecting the best kind of loan it all comes down to your individual circumstances, borrowing capacity and future aims and aspirations. Working with an excellent mortgage broker is a great start to helping you select the best loan for your situation.
About the author: Jamie is the owner and founder of Pass Go Home Loans and operates between the Noosa and Canberra offices. If you’d like Jamie to provide you with some credit advice – just complete and return this FORM
This information is not intended to act as financial, investment, legal, accounting or taxation advice – and for that reason should not be relied upon as specific advice for your situation. You should always obtain independent, professional advice prior to making any financial, investment, legal or taxation decisions.