It’s a great time to be on the hunt for a new home with competitive rates galore in the home loan market.

Historically low interest rates, and an as-good-as-it-gets-guarantee from the Reserve Bank of Australia that rates will stay low until at least 2024, has driven lenders to offer a swathe of loans at enticing rates.

While property prices have soared since the beginning of 2021, the cash rate has remained at 0.1 per cent for nine months. It means fixed and variable rates can be secured at less than 2 per cent.

But with all the terms and conditions – which is better – fixed or variable? There’s no one-size-fits-all loan because each product varies across a range of fronts, from exit fees to repayment terms. Your ideal loan should have a low rate and offer flexibility should your financial situation change or if official rates rise or drop in the future.

Here we look at the top things to consider before choosing your home loan.

Fixed rates

Mortgages with a fixed interest rate have the same interest rates for a set period of time. You’ll often hear people talking about “locking in” a rate because this is exactly what a fixed loan does.

Variable loans are traditionally more popular, but with interest rates being so low for so long now (the last time the RBA raised rates was in November 2010), more borrowers are opting for fixed loans. The latest Australian Bureau of Statistics data shows the value of new variable rate loan commitments funded in May 2021 rose 4.2 per cent, but the value of new fixed rate loan commitments funded in the same month grew at an even higher rate - jumping by 11.8 per cent.

Commonly, fixed loans are on offer for between one and 10 years, and during the agreed term the interest rate and required repayments remain the same.

For example, Mel wants to borrow $440,000 to buy a $600,000 townhome at Gallery estate in Western Australia. If she opts for a fixed rate home loan with an interest rate of 2.49 per cent and a five-year term, she will pay $1739 a month in repayments (based on a 30-year loan period).

The most obvious advantage of a fixed loan is being protected from rate rises. If the RBA shifts interest rates upwards, you will continue to pay at your fixed rate. Knowing this gives a lot of borrowers’ peace of mind.

Unlike variable rates that can move up or down every month, there’s the benefit of knowing the exact amount you’ll be paying for years to come, and this makes it much easier to stick to a budget.

But the downside is the risk of official rates falling lower than the rate you are locked in for. No one wants to be stuck paying a higher interest rate. The risk of this occurring increases over the course of a longer loan period.

The other disadvantage is fixed loans usually have less features than variable loans and this may include a redraw facility. There’s also the drawback of expensive break fees, which are incurred if you pay off your loan or want to switch loans before the end of the fixed term.

Variable rates

A variable rate can go up or down depending on the lending market and when official cash rates change. So, unlike fixed rates, there is no guarantee your repayments will stay the same - in fact – they are likely to move over the years as you ride the interest rate waves.

For example, Bec and Pete want to borrow $320,000 to buy a $520,000 house and land package at Botanical estate in Victoria. If they select a variable rate home loan with an interest rate of 2.34 per cent, they will pay $1420 a month in repayments (based on a 30-year loan period).

It’s almost impossible to predict what lies ahead with interest rate movement and this can make long-term budgeting difficult.

However, variable loans make up for this with a greater range of features and flexibility. It’s much cheaper to pay an exit fee on a variable loan than it is to pay a break free on a fixed loan.

Generally, you’ll find more options are packaged into variable loans. These could include the freedom to make additional repayments, a redraw facility and offset accounts to suit your payments and budget.

While these features could shave months, even years, off your loan repayments, they may come at an initial cost depending on the lender you choose. So you really need to weigh up whether these features are worth the spend.

Split loans

Much like ordering a half and half pizza, split loans give you the best of both worlds. With a split loan, some of your mortgage can be on a fixed rate and some can be on a variable rate. It may not be an even 50:50 split. You can decide the portions: it might be 70:30 or 60:40.

A split rate is ideal for people who either can’t make up their minds or want to hedge their bets on interest rates in the future.

Most lenders let borrowers split their loans, but not necessarily on all their products. So, you need to check the loan you are considering can be part of a split arrangement. For example, Tyler wants to borrow $170,000 to buy a $220,000 lot of land at Smithfield Village near Cairns. If he selects a split home loan that is 40 per cent fixed and 60 per cent variable with an interest rate of 2.3 per cent on both portions, he will pay $654 a month in repayments (based on a 30-year loan period).

There’s a lot to consider when deciding which home loan is the right one for you. Ultimately you need to aim for the lowest possible rate in order to pay a minimum amount of interest on the amount you borrow.

It really does pay to read the fine print. Be sure to thoroughly read and make sure you understand the terms and conditions of the loan and check to see if any application or annual loan fees apply.

There are a lot of lenders and even more loans, so shop around and compare rates. A good place to start is https://www.canstar.com.au/home-loans/

With the right loan, your mortgage need not hold you back from achieving your financial goals.

Satterley is Australia’s largest private residential developer and has built masterplanned communities across Western Australia, Queensland, and Victoria. For more information on Satterley’s affordable and award-winning communities, take a look at your nearest display village https://satterley.com.au/display-villages

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2021-08-06 Property Tips

Choosing a home loan: fixed, variable or split?

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