- Posted 02 Jun
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Today’s low home loan rates and climbing property values have convinced many people to buy their next home. Whether you are a first time home buyer, planning a move, or looking to refinance your current mortgage to save money, you’ll want to understand the three types of home loans available to you.
Fixed vs. variable loans
A fixed rate home loan means that your mortgage is locked in at a certain unchangeable interest rate. This can be comforting in times of fluctuating markets, because even if the cash rate rises your payments won’t change. You’ll always have the same amount due each month for the life of your loan.
The downside of fixed loans is that you typically cannot make extra repayments, so if you get a pay rise or a windfall, you cannot pay off your home faster to save money. The other potential disadvantage of a fixed rate mortgage is that it is fixed no matter what. If rates drop substantially, the only way you’ll benefit is to go through the hassle and expense of refinancing.
Variable mortgages are just the opposite of fixed rate loans. Australia’s cash rate has been cut 2.75 per cent since late 2011, and customers with variable rate loans have reaped the benefit. With a variable rate mortgage, you’ll see your payments go down if rates drop.
Unlike fixed home loans, with a variable rate mortgage you can make extra payments. So if rates drop but you discipline yourself to keep paying old higher amount, you can potentially shave years off your mortgage and save thousands of dollars.
The biggest downside to variable home loans is the risk involved. If rates rise, you’ll have to be prepared to make higher monthly payments.
Split rate home loans – the best of both worlds?
A split rate home loan is really a combination of two loans, one fixed and one variable. This combination lets home buyers enjoy the benefits of both types of mortgages. One part of your loan will remain fixed and impervious to rate hikes, while the other part can take advantage of rate fluctuations if rates continue to drop.
The main drawback of a split loan is that you may still be ineligible to pay back your loan early. On the variable portion, you can make extra payments to reduce your loan rate. But the fixed side will still impose penalties for early repayments.
Fixed rate, variable rate, and split loans all have pros and cons, and what works best for your family will depend on your circumstances. Is the stability of a fixed rate your most important concern, or do you want the option to make additional payments to your mortgage as your income rises?
To discuss your mortgage needs with a home loan professional, contact the home loan experts at Australian Credit and Finance. They can help you find the loan that fits your financial and family needs.