Why Should You Know the Differences Between Home Loan Options?

When applying for a home loan, one of the most important decisions you'll face is choosing between fixed interest rate, variable interest rate, or split loan options. Each type offers distinct advantages and considerations that can significantly impact your financial situation over the life of your loan.

Fixed Interest Rate Home Loans

A fixed interest rate home loan locks in your home loan interest rate for a predetermined period, typically between one to five years. During this time, your repayments remain constant regardless of market fluctuations.

Key benefits of fixed rate loans include:

• Predictable repayments make budgeting more straightforward
• Protection against rising interest rates
• Peace of mind knowing your repayments won't increase during the fixed period
• Useful for calculating home loan repayments over the fixed term

However, fixed rates also come with limitations. If variable home loan rates decrease, you won't benefit from lower repayments. Additionally, fixed rate loans often have restrictions on additional repayments and may not offer features like offset accounts.

Many borrowers approaching their fixed rate expiry need to decide whether to refix or switch to a variable rate based on current market conditions.

Variable Home Loan Rates

Variable interest rates fluctuate with market conditions and the lender's policies. When the Reserve Bank of Australia changes the cash rate, lenders typically adjust their variable rates accordingly.

Advantages of variable rate loans:

• Benefit from rate decreases when they occur
• Usually offer more flexibility with additional repayments
• Often include features like offset accounts and redraw facilities
• May provide access to interest rate discounts or promotional rates
• Generally have fewer restrictions on loan modifications

The main drawback is uncertainty. Your repayments can increase when rates rise, which may strain your budget if you haven't planned for higher payments.

Split Loan Options

Split loans combine both fixed and variable components, allowing you to enjoy benefits from both loan types. You might fix 60% of your loan amount while keeping 40% variable, though the split can be adjusted based on your preferences.

Benefits of split loans:

• Hedge against interest rate movements in both directions
• Maintain some payment certainty while retaining flexibility
• Access to variable loan features on the variable portion
• Ability to make additional repayments on the variable component

Split loans do require more management as you'll have two loan accounts with different rates and potentially different features.

Factors to Consider When Choosing

Your choice between these Home Loan options should align with your financial situation and risk tolerance. Consider these factors:

Current Interest Rate Environment: If rates are historically low, fixing might protect against future increases. Conversely, if rates are high, variable loans could benefit from potential decreases.

Your Risk Tolerance: Conservative borrowers often prefer the certainty of fixed rates, while those comfortable with fluctuation may choose variable rates.

Loan Features Needed: If you want an offset account to reduce interest costs using your savings, variable loans typically offer more features.

Borrowing Capacity: Higher rates affect your borrowing capacity, so understanding how different rate types impact your borrowing power is crucial.

Impact on Your Home Loan Application

When going through the application process, lenders assess your ability to service the loan under different scenarios. They may stress-test your application using higher rates than current market rates to ensure you can manage repayments if rates increase.

Your choice of rate type can influence:

• Required documentation during the Home Loan application process
• Lenders mortgage insurance (LMI) requirements
• Loan to value ratio (LVR) calculations
• Overall loan approval conditions

Making Your Decision

There's no universally correct choice – the right option depends on your circumstances. Many borrowers benefit from getting pre-approved for different loan types to understand their options fully.

First home buyers might prioritise payment certainty, while experienced property investors may prefer flexibility. Those buying a home should also consider how their choice affects other costs like stamp duty planning.

Personalised Finance can access Home Loan options from banks and lenders across Australia, helping you compare rates and features across the property market. Our streamlined application process ensures you understand how each option affects your specific situation.

Whether you're looking to refinance an existing loan or secure your first home loan, understanding these fundamental differences empowers you to make informed decisions about your mortgage.

Don't make this important decision alone. Call one of our team or book an appointment at a time that works for you to discuss which home loan structure suits your financial goals.