Many prospective home buyers will tackle this question when looking for a home loan – Should I chose a fixed, variable or split rate home loan? It’s important to remember your financial situation will dictate which option is right for you. Let’s explore these home loans types.
FIXED RATE LOANS
A fixed rate loan means that your interest rate and repayments are fixed or locked in for a set period, usually one to five years. Say you have a $500,000 home loan with a 4% interest rate, fixed for two years, your monthly payments will about $2390 a month. You’ll pay less in February because it has 28 days of interest and a bit more in months with 31 days. This type of loan offers financial certainty and the ability to budget set repayments each month, as you will not be affected by fluctuating interest rates. The downside is if variable interest rates drop your fixed rate remains as is. Also, many lenders will restrict extra repayments on the principal or may charge fees for doing so.
VARIABLE RATE LOANS
Variable rate home loans are Australia’s most popular type of home loan. The interest rate can vary throughout the term of the loan, going up or down, depending on the lender’s cost of funds and prevailing economic conditions. For the same $500,000 home loan, if the interest rate were to rise or fall by 0.5%, your monthly repayments are going to rise or fall by about $140 per month. The big advantage with variable rate home loans is flexibility. You can make extra and additional repayments without any repercussions and utilise an offset account. If you’re a good saver, a variable rate loan with an offset account will save you thousands on interest and allow you to smash down your home.
SPLIT RATE LOANS
Lenders also offer home loans which give you the option of combining a fixed rate home loan with a variable rate home loan. With a split rate loan, you can take advantage of the flexibility offered by a variable rate loan and the certainty of repayments offered by a fixed rate loan. This is a great way to minimise the risk of interest rate fluctuations as well as having great loan features and flexibility.
Your home loan needs to suit your personal preferences and financial circumstances. If you are after repayment certainty, go fixed. If you are looking to pay off your home quicker, go variable. For a bit of both, split the difference.
For more information contact us at Your Future First on 03 9362 1458 or email andy@yourfuturefirst.com.au