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Understanding split vs fixed or variable home loans

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Today’s low home loan rates and climbing property values have convinced many people to purchase their next home. Whether you are a first time home buyer, planning a move or looking to refinance your current home loan to save money, you’ll want to understand the three types of home loans available to you.

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Fixed rate home loans

A fixed rate home loan means that your home loan is locked in at a certain, unchangeable interest rate. This can be comforting in times of fluctuating markets, because even if the cash rate rises, your payments won’t change. You’ll always have the same amount due each month until the end of the fixed rate term. This makes budgeting easier, and can provide reassuring stability to borrowers.

Fixed terms can last between 1 and 5 years, and will default back to a variable rate at the end of the period. A borrower can choose to enter another fixed rate period, but the interest rate will likely be different.

The downside of fixed home loans is that you typically cannot make extra repayments, so if you get a pay rise or a windfall, you likely cannot pay off your home faster to save money. However, some lenders do allow for extra repayments on fixed rate loans, but these will usually be limited to a certain annual amount.

Unlike variable rate mortgages, you can’t easily refinance a fixed rate loan before the end of the fixed period. If you do violate your fixed rate loan terms and conditions by overpaying, paying off your loan early, or refinancing, you could be charged break costs.

Another potential disadvantage of a fixed rate home loan is that it is fixed no matter what. If rates drop substantially, the only way you’ll benefit is to go through the hassle and expense of refinancing.

Benefits of fixed rate home loans

  1. Borrowers are protected against interest rate rises
  2. Budgeting and organising finances is easier
  3. Enjoy consistency and stability with your loan repayments

Drawbacks of fixed rate home loans

  1. Limited access to loan features, such as 100% offset accounts
  2. Typically unable to make unlimited extra repayments
  3. Lenders may charge break costs if you refinance or overpay on your loan

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Variable home loans

Variable rate loans have an interest rate that is susceptible to changes at any time. This greatly influences your monthly repayment amount. If your lender increases interest rates, your repayments will go up, and vice versa.

Unlike fixed rate mortgages, variable rate mortgages typically offer a lot more flexibility. You can make unlimited additional repayments, add on loan features like an offset account or redraw facility, and refinance with (relative) ease. The ability to make extra repayments has the potential to shave years off your home loan and save thousands of dollars in interest in the long run.

But, you do have to deal with interest rate fluctuations which can cause mortgage stress, and changes to your repayment amount. Risk is one of the biggest downsides to variable interest rates.

What causes interest rate fluctuations?

The cash rate is the factor that most influences interest rate fluctuations. It is set by the Reserve Bank of Australia on the first Tuesday of every month (except in January). Because it influences business costs for lenders, it can lead them to raise or lower interest rates.

It’s important to remember that lenders can alter their interest rates independent of RBA cash rate decisions. For example, lenders may cite rising cost of funding as a reason for the increase. Alternatively, they may follow the lead of other lenders. So, if other lenders are reducing their rates, a lender may choose to do the same in order to remain competitive and attract customers.

Benefits of variable rate home loans

  1. When interest rates drop, you benefit from reduced repayments
  2. Ability to make extra repayments
  3. Option to add on loan features like a redraw facility or offset account
  4. Refinance at any time with no break fees

Drawbacks of variable rate home loans

  1. Higher risk due to fluctuating interest rates
  2. Repayment amounts can vary based on rising or falling interest rates
  3. Risk of mortgage stress
  4. Lenders are able to change their interest rates independent of RBA cash rate decisions

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Split rate home loans – the best of both worlds?

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A split rate home loan is really a combination of two loans, one fixed and one variable. This combination lets home buyers enjoy the benefits of both types of loans. One part of your loan will remain fixed and unchanged by rate hikes, while the other part can take advantage of rate fluctuations if rates continue to drop.

The main drawback of a split loan is that you may still be ineligible to pay back your loan early. The variable portion of the loan will allow you to make extra repayments to reduce your loan rate, but the fixed side will still impose penalties for early repayments.

Fixed rate, variable rate, and split loans all have pros and cons, and what works best for you will depend on your circumstances. Is the stability of a fixed rate your most important concern, or do you want the option to make additional payments to your home loan as your income rises?

To discuss your home loan needs with an expert, contact the Home Loan Specialists here at Lendi. We can help you find the loan that fits your financial and personal needs.

Refinancing shouldn't be painful. Lendi makes it easier.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: refinance, fixed rate home loans, standard variable loan, split loan, variable interest, offset account, redraw facility, official cash rate, rba cash rate, cash rate, new purchase

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Important legal stuff

Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
# Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
Lendi is a privately owned and operated Australian business. Our mission is to change the way Australians get home loans by providing a faster, smarter and more secure home loan experience designed around the customer’s convenience and needs. Although Lendi compares over 1600 products (2,500+ products including feature and pricing variations) from more than 35 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 35% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors.
*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
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