You have found your dream home. So, what’s next?
One of the most important decisions you will make once you have found your chosen property is to decide on the right loan structure. Namely, whether you will choose a fixed or variable home loan or a mix of the two. Here we will discuss the pros and cons of both fixed and variable home loans to help you decide which loan structure is right for you.
A variable home loan is a more flexible home loan structure with an interest rate that can fluctuate depending on the cash rate and your lender’s discretion. The RBA sets the nation’s official cash rate which can change on a monthly basis. It rises or falls in response to inflation, the nation’s economic status and the lending patterns and behaviours of borrowers. Lenders may also choose to raise their interest rates regardless of an official cash rate increase due to reasons such as increased funding costs.
Both these factors mean variable home loan rates can go up or down at numerous times throughout the year and over the life of your loan. When interest rates are low, your monthly repayments will be less, and vice-versa.
Variable home loans tend to offer more features than a standard fixed rate loan including:
An offset account
An offset account can help to reduce the interest paid over the life of the loan.
A redraw facility
If you pay extra repayments into your loan, a redraw option allows you to pull out those funds if you ever need them for no fee (dependent upon your lender).
You can also make extra repayments without penalty and pay off your loan quicker than the maximum loan term without penalty.
A variable home loan is at the mercy of the RBAs cash rate decisions and your chosen lender’s decision to raise or lower their rates. There is less confidence in knowing what your repayments will be year to year. Both these factors can lead to mortgage and financial stress if you are not adept at managing your finances. It is advised to pay a little more you’re your minimum repayments to give yourself a buffer should interest rates rise.
A fixed loan is a set loan term where your interest rate will not change over that time period. Fixed term loans are generally 2,3 or 5 years in length. Once you complete your fixed term, your loan will revert to a variable loan.
The main pro of a fixed rate loan is stability. You know what your repayments will be for the life of the fixed term. It is common for people to fix all or a portion of their loan when interest rates are low. It is important to understand that fixed rate loan will always have a slightly higher interest rate than the going variable loan rate.
You are tied into the rate even if interest rates do fall. In most fixed rates, there are no redraw or offset accounts, limiting your capacity to decrease the interest paid over the fixed rate period.
A split home loan gives you the opportunity to have the best of both the variable and fixed rate options. A split rate home loan gives you the option to divide up your loan into fixed and variable proportions. Ie: 60/40, 50/50. The benefit is a portion of your home loan will be locked in if interest rates do rise. The drawback is you are also tied to this repayment amount if rates indeed drop. The variable portion of your loan may reap the benefits of an offset account and redraw facility, depending on your lender’s terms.
Assess your current lifestyle. Are you single, getting married or starting a family? Are you looking to commence study alongside full-time or part-time work? All these factors, plus more, can impact your ability to repay your loan. Not only should you consider your current lifestyle and situation, but also your ability to manage your finances. Will you be able to manage the fluctuations that come with a variable home loan? Would you like the option to know you can redraw extra repayments back from your home loan should you ever need them?
All these questions can help you decide which home loan structure is right for you. Variable home loans are more widely used throughout Australia, but the decision is ultimately yours.
At Organic Home Loans, we are here to assist you in making the process of securing your home loan, whether fixed or variable, a straightforward one. We cut through the red tape and provide you with the facts. The more informed you are about banks’ expectations and requirements, the greater your chance of a successful outcome.
Let our home loan experts guide you to the correct loan.
