It’s the question every Aussie with a mortgage has to grapple with – should you choose a fixed, variable or split home loan?
Finance specialist, John Tindall from Accumulus Home Loans in Sydney, translates the mortgage jargon, explains the pros and cons of the different types of loans and shares his thoughts about which approach is best.
The lowdown on fixed
Tindall says a fixed rate loan provides a “predictable interest bill” – and this is its appeal for many.
“If, for example, you have a home loan with a 4% interest rate, fixed for two years on a $500,000 loan, then the monthly payments will about $2390 a month. You’ll pay less in February because it has 28 days of interest and a bit more in months with 31 days,” he says.
“Although most lenders allow some degree of additional repayments, your fixed rate loan is a bit like a big ice cube, which reduces at a steady predictable pace,” Tindall adds. “And that means you can budget for it.”
There are pros and cons for different types of loans. Picture: Getty
The flexibility of variable
“A variable rate is more fluid,” Tindall says. “The interest rate can rise or fall depending on the lender’s cost of funds, which might include things like domestic deposits or the international money markets,” he says.
“If the interest rate on the same $500,000 loan rises or falls by 0.1%, your repayments are going to rise or fall by $30 a month. That’s been great for the last 29 years – as interest rates have been mostly declining since early 1989 – but can have a nasty bite when they’re going up,” Tindall says.
The advantage of a variable rate loan is its flexibility, he says. “You can pay off as much as you want; that might be from tax refunds, windfalls or regular extra payments. And variable loans may also have an attached offset account.
“These two features mean you should pay less interest over the life of the loan,” Tindall says.
“Variable rate loans are more like a jug of water; the interest repayments can change without much notice, you can reduce it faster with more repayments and an offset or you can top it up again, through a redraw.”
What’s the major difference between a fixed and variable loan?
To sum up, a fixed home loan is a rate of interest charged on the loan amount which doesn’t change for the duration of the fixed term, commonly between one to five years, where as a variable home loan is a rate of interest that can rise or fall.
Tindall says most people end up with a variable rate loan, simply because they haven’t changed it for years or thought interest rates would drop over time.
“Well, they’ve been mostly right for most of the last 30 years. But it depends on what you as a borrower need to make your loan work best for you,” he says.
Split the difference
But wait, there’s more. A split loan is made up of more than one type of loan. “This allows even more flexibility in designing the loan for your particular needs,” Tindall says.
“For example, first home buyers and investors might have mostly fixed rates to get used to having a regular, budget-able loan repayments. People who want to smash down a loan would prefer variable rate loans.
“In my opinion, it’s mainly a considered choice between predictability and flexibility,” he says.
A split loan allows for more flexibility. Picture: Getty
So, what’s best?
Personal circumstances and preferences dictate which option is best, Tindall says.
“If you’re concerned about the impact on your family budget, then consider a fixed rate loan. If you want to smash your loan down, consider a variable rate. If you want a bit of both, then split! And if you’re confused, ask a lender or a mortgage broker,” he says.
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