Sometimes it can feel like you’ve missed an important memo when it comes to banking and mortgaging terminology. Split loans, fixed rates, refinancing, offset accounts – and that’s just the introduction! We like to think we make it easier to find the right loan, but we also want to make them easier to understand as well.
After all, according to the Australian Finance Group, the average mortgage in June 2015 was $461,000; perhaps one of the largest financial commitments a person will make. As a result, you’ll want to make sure you are considering all of your options!
For that reason, here is a brief guide to the differences between fixed and variable mortgage interest rates.
Fixed
Fixed home loans let you know exactly how much your obligations are, in the form of a specific percentage every payment period. You will always be paying this amount for a set length of time, usually one, three or five years. This can give you stability, but MoneySmart advises that lenders often do not allow additional repayments on a fixed interest rate, meaning you don’t have control over how fast you repay your loans.
Variable
Variable home loans fluctuate with changing interest rates. Sometimes you will be paying more, sometimes you will be paying less, depending on the lending environment such as the official cash rate, new legislation and your mortgage lender.
This can have the benefit of reducing your repayments occasionally, but does make it difficult to budget for your repayments, as you will not know what to expect. However, often you will be allowed to make additional payments when you have a variable loan, enabling you to pay off your debt faster.
Split
Sometimes you really can have the best of both worlds. Split loans are a combination of variable and fixed loans, where you ‘split’ your commitment so you are paying some of your debt off with a fixed rate, and some of it with variable interest.
A common tactic according to MoneySmart is to split 50 – 50, so half of your loan is on a fixed rate and half of it is on variable.
This way, you are able to make additional payments on some of your loan due to it being variable, as well as taking advantage of any drops in interest rates. At the same time, you know that half of your loan is always going to have consistent repayments, so you can budget accordingly.
If you are finding that your current loan is not right for you, you may want to consider refinancing your loan. For more information, contact us today!