Jan 28, 2019

Our Insights

Finding the best home loan deal is important but setting up the right home loan structure is equally important, writes Adelaide mortgage broker Cliff O’Connell.

There are a number of ways to structure your loan, including a fixed, variable or split rate. Choosing a loan that suits your personal circumstances and goals is important to help you make the most of your budget without carrying around the stress of your mortgage repayments.

Which home loan structure will you choose?

We’ve broken down the pros and cons to help you choose between a variable, fixed or split rate loan.

Variable Rate Loan

The key feature of the variable rate loan is that the interest rate charged on the outstanding balance increases or decreases in accordance to the changes in market interest rates.

As a result, your payments will vary too. Another key feature is flexibility. When choosing a variable rate loan, you will not get penalised for increasing your payments or paying your mortgage off early.

Pros: 

  • Repayments fall when interest rates fall
  • Usually offer a lot of flexibility and additional features, such as ability to make additional payments, low introductory or “honeymoon” rates and a redraw facility which allows you to take out any extra money you have put in
  • Can make it easier to pay your mortgage off faster

Cons:

  • Interest rate is higher for variable loans because of the additional features it offers
  • Repayments increase with the rise of interest rates, you’ll need to monitor the market closely
  • Becomes difficult to budget for the future because of the uncertainty of interest rate movements
  • No stability and increased mortgage and budget stress if you aren’t prepared for the rate rise

Fixed Rate Loan

A fixed rate loan is a loan that has a fixed interest rate and as a result, fixed repayments. The period of these loans can vary, but typically you can lock in your repayments for between one and five years. Though the fixed rate period may only be a couple of years, the total of the complete loan can be 20 or 25 years.

At the end of this period you are given the choice to either continue with the fixed loan, but at the current market rates, or choose to convert to a variable interest rate loan for the remainder of the time.

Pros:

  • Your repayments do not rise with the official interest rate, providing peace of mind and predictability
  • If market forces change and interest rates skyrocket, you won’t be impacted
  • Allows for more accurate budgeting

Cons:

  • Repayments do not fall if interest rates drop
  • Only allows for limited additional payments
  • Potential penalties for early pay-out of the loan

Split Rate Loan

A split rate loan has one portion of the loan fixed and one portion variable, giving you the decision of choosing what percentage of your mortgage to allocate to each. This gives you the “best of both worlds” - the certainty of a fixed rate on part of your loan, as well as the flexibility of a variable rate on the other half. 

Pros:

  • Reduce the impact of interest rate fluctuations on your home loan as it only affects a portion of it
  • Retain the ability to take advantage of rate reductions through the portion of your loan with a variable rate
  • Provides some peace of mind about rate rises and allows for some accurate budgeting
  • Can make additional payments on variable portion
  • Beneficial for when the market is especially unpredictable

Cons:

  • Repayments on variable portion will rise with the interest rates
  • Cannot benefit fully from rate reductions

Talk to an expert

Before you make a decision on your loan structure, seek advice from an experienced mortgage broker. You will have your own views about the next step, but a mortgage broker can draw on their market experience to give you crucial advice as well as helping you find the best possible deal.

Calder Financing Broking can find you the best deal for your needs, and guide you through the process.

Contact the team or call directly on 08 8373 3333 to meet an experienced broker today for a free, no obligations discussion about your needs.

Written and Supplied by Cliff O’Connell of Calder Finance Broking, for more information please visit the Calder Finance website. Please note that Calder Finance Broking Pty Ltd is a Corporate Credit Representative of BLSSA Pty Ltd ABN 69 117 651 760 ACL 391237.