Variable, fixed or split? Which home loan is for you

9th December 2015

“Should I fix my mortgage or is variable better for me? What about a bit of both?”

An all too common question for today’s mortgage brokers, especially around the first Tuesday of every month when the media is wanting to report on what the experts say the reserve bank will do. Will the cash rate go up, will it go down or will they leave it.

Before we answer this common question and determine which option will be suitable for you, let’s firstly look at that absolute basics of these loans.

Variable

A variable rate loan is where the interest rate can fluctuate both up and down and has no set life span within the overall loan term. The main benefit to a customer is the ability to have the flexibility of choice without restraint from a fixed rate period. Customers can pay down the loan as quickly as they wish without penalty and should they wish to break the loan agreement the costs to do so are minimal.

Fixed

A fixed rate loan is where the interest rate does not fluctuate during the fixed rate period. This feature allows the customer the ability to budget without the concern of their mortgage rate increasing, therefore, increasing their out of pocket mortgage costs. Should a customer wish to make extra payments they can, however, most lenders will only allow a small amount per annum to be paid. If you choose to exit the loan while it is still within its fixed rate period, the costs to do so can be great.

Split

Splitting your loan means you can choose to have both a variable rate and a fixed rate within the total loan amount. This allows the borrower flexibility within their variable portion and the certainty of payment amounts from their fixed rate portion. Some lenders will let you have upwards of 5 different splits should you wish to.

Conclusion

Whichever choice you decide is best for you always ask your broker to explain the negatives of each product as the wrong decision could cost you. For example, you probably wouldn’t want to fix your loan for 5 years if your plan is to sell your property and pay off your debt within 3 years, the costs in doing so will be great.

When in doubt seek out your nearest My Local Broker.

A self confessed mortgage and finance geek who likes nothing more than taking the tech out and make it readable to mums and dads.

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