Fixed, variable or split? – Find the right loan to fit your needs
Good Mortgage Brokers are educators not sales people. So much about your home loan is in how you structure it. By finding your best option, this can save you time and money on your mortgage. Below is some information that may help you choose the repayment structure that works best for you and your financial situation.
Variable Rate Loans
Having a variable rate loan is all about flexibility. As the market moves, your interest rate moves up or down. This may also mean that your repayments on your variable loan could change month to month.
- Interest rate drops = repayments may drop.
- Interest rate rise = repayments will increase.
Many variable rate loans can come with additional features which may help reduce the amount of interest paid over the loan life. Example: A variable rate loan with a 100% offset arrangement links your loan account to your savings account. So, any funds that are held in your savings account are offset against the borrowed amount, therefore reducing the interest you pay.
If you wish to pay your loan faster and you have additional funds that are available, a variable rate loan will allow you the flexibility of increasing your payments.
Fixed Rate Loans
A fixed rate loan is a loan where the interest rate is fixed for a determined period and is unaffected from any movements in the market.
The 2 most common (and popular) choices for fixing your loan are three and five year fixed rate loans. Other options can vary from one to ten years.
With your payments, a fixed rate loan will allow you to make regular repayments. This is excellent for borrowers who are on strict budgets or for those who are entering a mortgage for the first time and want set payments for a period of time.
If at any such time that there is a drop-in interest rates, being locked into a fixed rate may mean your repayments are higher than they otherwise would be. If you wish to break out of a fixed rate loan it can potentially cost you a lot of money in break fees.
Many banks will allow you to make extra payments to a fixed rate loan but there will be a limit to the amount you can pay. This will vary from lender to lender.
Split Rate Loans
A split rate loan is an arrangement where you can have both fixed and variable interest rates on your loans at the same time.
A split loan allows you to allocate a portion of your loan amount to attract a variable interest rate and another portion to attract a fixed rate. This type of split protects you as the borrower, from rate rises (fixed rate) and benefiting from the rate drops (variable rate).
Most banks will allow you to split your loans from the beginning of your loan without having to pay for two separate loan applications.
So, which one?
There are several factors that will help you choose the right kind of loan for you, such as your personal situation, your earning capacity and long-term goals for your property.
Speaking with a mortgage broker like myself, will give you some guidance for you to make an informed choice and could help you save money along the way. I want to make a plan with you to make your property dreams come true.