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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 term.

The downside of fixed loans is that you typically cannot make extra repayments, so if you get a pay rise or a windfall, you cannot pay off your home faster to save money. The other 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.

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Variable home loans

Variable home loans are just the opposite of fixed rate loans. Australia’s cash rate has fallen by 2.75% since late 2011, and customers with variable rate loans have reaped the benefit. With a variable rate home loan, you’ll see your payments go down if rates drop.

Unlike fixed home loans, with a variable rate home loan you can make extra payments. So if rates drop, and you continue paying the old, higher amount, you can potentially shave years off your home loan and save thousands of dollars in the long run.

The biggest downside to variable home loans is the risk involved. If rates rise, you’ll have to be prepared to make higher monthly payments.

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.

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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

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Important legal stuff

Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856, Credit Representative 518849), 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 Aussie business. Our mission is to provide Aussies with the right experience when choosing a home loan from our panel of lenders including ClickLoans, a related body corporate of Auscred Services. Although Lendi compares over 1600 products from over 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 40% 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. We have an independent and founder led board.
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.
EXAMPLE: This example is current as at 20th October 2016. A Click Loans Online Principal and Interest Loan of $150,000 over 25 years has monthly repayments of $767. This is calculated based on the interest rate of 3.69%, comparison rate of 3.69%, upfront fees of $0 and annual fees of $0.
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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