Home Loans: Fixed, variable or split?

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Picking a home loan that best suits your needs.

To begin your journey towards buying a property, you may find that raising capital is an important aspect in making your first purchase. Many Australians rely on mortgages to purchase their first owner-occupied home.

Given the predicted interest rate rise1, you may be wondering what types of home loans are available to you and best suit your needs. Should you go with a fixed, variable or split interest rate loan?

Variable and fixed-interest loans

Over a period of time, the variable interest rates offered by a lender will fluctuate depending on a variety of economic factors. Sometimes, they will drop, resulting in smaller repayments, but they can also rise.

This is the essential difference between variable and fixed interest loans, and is likely to be a factor you’ll consider if you’re purchasing a property in 2017. If your objective is to become an owner occupier in 2017, the predicted increase of mortgage interest rates may be something to take into account.

On the other hand, fixed-interest loans allow you to know exactly how much your repayments are going to be each month for a set number of years, regardless of wider economic changes. This means you are protected when interest rates rise, but do not benefit if they fall. Once the fixed rate period ends, the loan usually converts to a variable rate and is subject to fluctuations as explained above.

One particular option to note is the split loan. This allows you to put some of your loan in a variable interest arrangement, and some on a fixed basis. This could allow you more certainty in relation to repayments, but some flexibility if the market changes.

Over a period of time, the variable interest rates offered by a lender will fluctuate depending on a variety of economic factors.

Interest-only mortgages

Fixed Interest mortgages with interest only repayments are becoming a ubiquitous form of loan for investors, with more than half of new investment loan approvals over the last few years being of this type2. These loan arrangements may only require you to pay back the interest over a set period of time, then converting to interest and principal repayments for the remainder of the loan term.

As such, your repayments are smaller for the interest only period, but would increase once the interest only period ends and principal is included in the loan repayment. You also would need to take into account the timing of fixed rate interest periods and their conversion into a variable interest rate.

It can be a complicated evaluation process when deciding how to structure your owner-occupied home loan, particularly if you are planning on purchasing a property in the very near future. Given this, consider consulting an expert to discuss options for structuring a mortgage for your unique set of circumstances.

 

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Source:

1. ABC News, Interest rates on mortgages likely to rise, despite steady Reserve Bank, December 2016

2. Reserve Bank of Australia, Financial Stability Review, April 2016