- 17 Apr, 2018

Decision: Fixed, Variable or Split Rate Home Loan?

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There are hundreds of home loan packages available to choose from at any given time. Therefore, trying to determine which home loan type is right for your individual needs can be confusing. However, to make your task easier, we take a look at the key home loan types – fixed, variable or split rate – for you, then present you with the facts.

Key Home Loan Types – Fixed, Variable or Split Rate

All home loans apart from interest-only 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 being:

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Fixed loans – This loan type offers borrowers a fixed interest rate. Thus, a borrower repays a set amount monthly for a specified period. Usually, periods are between one and five years. Consequently, 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. Plus, extra repayments get capped, and features such as offset and redraw are typically not available.

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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. 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. Also, these types of loans give you the freedom to refinance without incurring break fees.

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Split loans – Classified as the new kid on the mortgage block, the split loan gives borrowers the best of both traditional loan options – the variable and fixed rate. As such, this loan option enables lenders to split your loan over multiple accounts that attract varying rates of interest. Consequently, the split rate mortgage offers you some rate rise protection and loan features. This loan type is ideal for home buyers looking for security and flexibility, with you able to negate risk and take advantage of depreciating rates.

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Home Loan Comparison – Fixed, Variable or Split Rate

So, what are the pros and cons of the three key home loan types – fixed, variable or split rate? Let’s look at these now.

Fixed Rate

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

Variable Rate

Pros
  • Rate changes – The rate fluctuates with the market, so it can be lower than fixed.
  • Payment flexibility – You can pay off your home loan quicker.
  • Reduced fees – Exit fees no longer apply to loans taken out after July 2011.
  • Greater features – Access to all home loan features.
Cons
  • Rate changes – The rate fluctuates with the market, so it can be higher.
  • Greater risk – No budgeting assurance.
  • Need for more capital – You may need more income to cope with rate rises.

Split Rate

Pros
  • Increased savings – The fixed portion of the loan could save you more when rates rise.
  • Greater security and flexibility – You’ll have greater interest rate security and repayment options.
  • Increased repayment options – You’ll be able to make unlimited repayments on the variable part of your loan.
  • Feature access – You’ll have access to redraw and offset features that reduce interest costs.
  • Competitive rates – The rates offered will be more workable.
Cons
  • Increased repayments – A part of your loan rate varies with the market, meaning that you may pay more if rates rise.
  • Additional fees – You may attract added establishment and on-going fees for more than one account.
  • Greater funding – You may need more funds to cover the variable portion of your loan if rates rise.
  • Break fees – The fixed part of your loan may attract break fees 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 is a variable rate home loan offering you the lowest rate possible with no features. However, the definition of a basic loan varies from lender-to-lender. So, it is worthwhile reviewing terms and conditions, rather than plunging into the mortgage deep-end.

A standard loan, however, comes with features but may incur a higher rate. Therefore, it’s important to look at the features on offer and to consider if you’ll use these. If you won’t, then don’t opt for the inclusion of these. But, just bear in mind that some features such as an offset account or redraw facility can reduce the cost of your mortgage over time. For instance, if you have a $30,000 offset account linked to your mortgage this will reduce your home loan principal from $250,000 down to $220,000. Therefore, you could save a lot in interest and shave years off the term of your loan.

Package loans, on the other hand, group together other loans, transaction accounts and credit cards, giving you an ongoing discount. These bundled products usually give you a discount on your interest rate for the lifetime of your loan.

When determining which loan type is right for you, there is no right or wrong solution and it all depends on your individual needs. For whichever loan type you are after, contact eChoice, as our brokers can compare 100’s of home loan products and can help to find you a competitive mortgage.

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