Home loans are comprised in one of two major categories – fixed and variable rates. When arranging finance for new homes this will be one of the major choices that you consider.
With interest rates at almost record lows, and the lowest they’ve been in around 60 years it might seem like choosing a fixed rate is the best option during the current period, however for many homeowners a variable interest rate offers the flexibility that they need from their mortgage.
The team at Dixon Homes Sunshine Coast explain the major differences between the two options in our latest post.
Variable Home loans
A variable home loan is one where the interest rate can decrease or increase in line with the official interest rates set by the Reserve Bank of Australia. This means that the payments can increase or decrease in line with rate changes.
Fixed Interest Home Loans
Fixed loans are where the interest rate is locked in for the period (usually between 1-5 years.) If the interest rate is 5% p.a this will be stay static for the course of the period after which the borrower can opt to enter another fixed period based on the current interest rate of the period, or stay with a variable rate.
Which offers more flexibility?
Variable interest rate loans offer far more flexibility since they allow you to make additional repayments without attracting fees like many fixed loans have. They also make it easier to refinance if you need to change banks and unlike fixed loans this can be quite expensive (upwards of $10,000) The extra payments made in a variable home loan these can be redrawn if necessary.
Benefits of an Offset Account
Variable home loans also allow you to create an offset account linked to the home loan account. If you have $20,000 sitting in an offset account, and the balance in the mortgage is $350,000, interest will only be calculated on the $330,000. This can be useful since if you have a sizable balance you will be charged less interest and therefore you can payoff more of your loan faster.
Over the life of the loan this can make a marked difference. Since interest is calculated daily, even if you have funds in the offset account for just one day, you will be charged less interest, so it can be worth having wages paid into the offset account.
Splitting Your Loan – The best of both worlds?
Many people are choosing to split their loan into 50 per cent of the balance as fixed, and the other 50 per cent as variable. By doing this you can have access to an offset account with the variable component of the loan, and work on reducing the variable component faster by bulk deposits.
That is not to say that fixed is a bad option, especially for a certain period since banks do offer attractive fixed period for a period of 1-3 years. But when choosing an entirely fixed period, it’s important to consider what the future is likely to hold. Are you planning kids? Or selling the home and buying another home? It this is likely to be the case, a variable loan will be the better option.
Dixon Homes systems have a trained Dixon Direct team to provide more advice for the property investor, including securing finance. Our finance brokers can help secure the best loan for you. For direct help and advice for property investors call us today (07) 3274 0773