- 7 Jul, 2017

Decision: Fixed, Variable or Split Home Loan?

There are hundreds of home loan packages available at any given time. As a result, trying to determine which loan type is best can be confusing. Therefore, to make your task easier, we critically look at home loans for you, then presented you with the facts.

Key Home Loan Types

All home loans have two essential factors – principal and interest. The principal is the amount borrowed, and interest is the amount paid to borrow the money. Consequently, there are three key types of home loans centred on these two factors. These are as follows:

1. Fixed loans – This loan offers borrowers a fixed interest rate. Thus, repaying a set amount monthly for a specified period. Usually, periods are between one and five years. However, this type of loan gives borrowers budgeting reassurance, with protection from rising rates. But, the downside is if variable rates drop, then you will pay more than needed.

2. Variable rate loans – Classified as the most popular type of rate due to flexibility, variable rates rise and fall with the market. Alternatively, lenders can make independent rate rises, if needed. Hence, borrowers will pay varying amounts of interest under their set rate. Some borrowers find this concerning, while others welcome the freedom. A variable rate means that a borrower can pay off their loan as quickly as they want, without penalty.

3. Split loans – Many lenders now allow you to fix a part of your home loan, and to leave the rest variable. As such, this type of loan is known as a split mortgage. Selecting this option gives you the best of both worlds – some rate rise protection and rate cut benefits.

Home Loan Comparison

So, what are the pros and cons of the three key home loan types? Let’s look at these now.

Fixed Rate

Pros
  • The fixed term is over 1- 5 years, so repayments stay fixed for the term making budgeting easier.
  • The rate can be lower than the market for the term.
  • Some fixed loans allow you to pay off extra up to a set amount.
  • A redraw facility for some fixed loans is available.
Cons
  • The fixed rate can be higher than the market rate.
  • Repayments can be higher than needed.
  • Fewer opportunities to pay more off the loan.
  • Break fees when paying out the loan early.

Variable Rate

Pros
  • The rate fluctuates with the market, so it can be lower than fixed.
  • You can pay off your home loan as fast quicker.
  • Exit fees no longer apply to loans taken out after July 2011.
  • Access to all home loan features.
Cons
  • The rate fluctuates with the market, so it can be higher.
  • No budgeting assurance.
  • More income can be needed to cope with rate rises.

Split Rate

Pros
  • A portion of your loan stays fixed for a term.
  • This loan gives you interest rate security and repayment flexibility.
  • Flexibility to set the fixed and variable portions of your loan.
  • Access to redraw and offset features.
Cons
  • A part of your loan rate varies with the market.
  • You may need more funds to cover the variable portion of your loan.
  • Break fees on the fixed part of your loan should you wish to pay it out.

Other Home Loan Types

Apart from fixed, variable, and split loans, you may encounter basic, standard, and packaged loans. A basic loan offers you the lowest rate possible with no features. A standard loan, however, comes with features, but may incur a higher rate. Package loans group together other loans or credit cards, giving you an ongoing discount.

Are you looking for a fixed, variable, or split loan? Then contact eChoice. Our brokers could help find you the right mortgage.


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