Fixed or Variable rate home loan? Split loan? Mortgage Offset? Redraw Facility?

Who knew something as simple as a loan to buy a home (investment or principal residence) could be so confusing? Without wanting to run the risk of stating the obvious to those who already know the various options are with regard to home loans, I thought it worthwhile running over the basics again as in future months, I’m planning on delving deeper into the finer intricacies of loans including if you are better off having all of your loans with one lender or not, advantages of various ownership structures of loans and how debt recycling strategies can help you build wealth, etc.

Let’s start with the absolute basics; Fixed vs Variable

• A “fixed” rate loan is as it states, fixed for a pre-agreed time when the loan is set up, generally 2, 3 or up to 5 years. The upside to this is that you have certainty over your loan repayments for the timeframe agreed. The downside is that if you wish to convert to a “variable” rate loan before that timeframe has elapsed, if the variable rate available is lower than the fixed rate you were on, usually the lender will charge you a “break” fee. This is usually the difference in the interest they would have earned from you on the fixed rate if you had remained for the full term of the loan, compared to the variable rate you are now wanting to switch to. Quite often there will be new loan fee’s etc also involved. Another downside of fixed loans is the inability to make extra repayments to pay down loans quicker.
• A “variable” rate loan is re-rated every month at the banks discretion (usually in line with the Reserve Banks cash rate) for the life of the loan. The advantage of this is evident in recent times with interest rates dropping and predicted to drop further again in the coming 12 months or so. The disadvantage of these types of loans is that you cant be sure that repayments wont increase over the medium to long term as rates are determined by larger economic factors. You are able to make extra repayments on these loans at any time, and “offset” and “redraw” facilities can be available with them for added flexibility.
• “Split” loans; This is a combination of both fixed and variable and is often used when people want to “lock in” a repayment via a fixed loan for a portion of the loan whilst the balance is of the variable kind.
• Mortgage Offset accounts; this is an account linked to your home loan where additional repayments are held. The amount in this account reduces the principal of the loan so even if you are still making the minimum repayment, you are paying down the loan at a faster rate of time. You can have more than one offset account on a mortgage and these can be handy for people that have access to lump sums of cash on a temporary basis but need that cash in the future.
• Redraw Facility; this is a feature of some loans which allows the borrower to have access to any extra funds paid off the loan or if the principal amount has been reduced over time.

How you set up a loan from the outset is crucial as there are nearly always costs (sometimes quite sizeable) involved to change loans or lenders in the future. We always view a loan structure with the future in mind and take into consideration the flexibility you need now but also in years to come.

If you have a loan that was set up direct with a lender but are not sure if you are on the best rate available to you, please get in touch as we can often get a better rate for you whilst keeping your loan with the original lender!