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The F word

There are numerous decisions to make when you are considering purchasing a home.

Not only must you choose the type of property you would like to purchase, but you must also decide on the location, settle on the size and work out how you are going to pay for it.

Most strata properties are purchased with the assistance of a home loan but even once you have secured financing you are then required to make a call on whether to fix the loan, float the loan or a combination of both.

Like most important decisions there are pros and cons for each option and the consequences of making the wrong decision could have a devastating impact on your ability to get ahead.

An analysis of home rates available in October, by comparison site Finder, revealed that there are big differences between the variable and fixed rates currently being offered by the major lenders.

It showed that variable rates available to owner occupiers ranged from 2.69% to 3.03% for terms of between one and five years, down from a high of 3.84% during the same period last year.

There was less of a difference between lenders offering fixed rates, with lenders offering between 2.74% and 2.99% for the same group, down from a high of 3.54% in October 2018.

Fixed home loans have an interest rate that is fixed for a set period of time. At the end of the fixed rate term, the loan usually reverts to the standard variable rate offered by the lender.

The advantages to fixing your home loan include the fact it makes budgeting easier. This is because you know precisely what your repayments will be so you can plan ahead. The other advantage of going down this track is the knowledge that at least for the term agreed upon with your bank, you will not be impacted by rate rises.

But there are also disadvantages. The most obvious of these are that any drop in rates once your term has begun will not apply to your loan. Another issue is that additional loan repayments are often not allowed with fixed rate loans, while redraw facilities are also rarely offered on this type of fixed loan.

ASIC’s Money Smart website says fixed rate home loans may not be suitable if you are thinking about selling your home or are considering switching home loans in the hope of a better deal.If that type of home loan rate doesn’t suit, you may consider a variable home loan. This means your interest rate will rise or fall over the term of your loan, therefore your repayments will vary as the rate changes.

The great thing about variable home loans is that you can make extra repayments at no extra cost which will save you interest and help you to pay off your loan faster.

Variable rates are more flexible than fixed and usually bring with them more features such as the ability to set up an offset account or unlimited redraws.

The flip side of the coin is that variable rates also make budgeting harder and have been blamed for increasing mortgage stress if you find you are taken by surprise as the result of an unexpected rate rise.

Variable rate home loans work best when you are coming to the end of your home loan term or are anticipating a financial windfall such as an inheritance.

Those in the market for a new home loan also have the option of splitting their loan where part of it is fixed and part of it is variable. Generally you can allocate the funds any way you choose, depending on your personal circumstances.

The advantage to this is that you are in a position to manage some of the risks of interest rate rises yet are also in a great position to take advantage when interest rates are lowered or when you would like to make more frequent repayments.

Whatever way you decide to go it’s important to remember that your mortgage is a debt you’re usually stuck with for a long time so it’s always worth considering all options before locking in any decision.

The information contained above is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice.

 

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