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Fixed, variable, or split home loan?

When it comes to home loans, there are many decisions to be made. What size loan to apply for?  What LVR to use? What interest rate repayment style to use? The choice between fixed interest rates and variable interest rates is one of the key points that buyers need to decide on, but how does a buyer make the choice to suits their needs? Let’s look at the type of home loans available to buyers.

Fixed home loan

A fixed home loan is where the interest rate is agreed and cannot move for an agreed period. Many lenders will let you fix your interest rate for anywhere between one and five years. The benefit of fixing a rate is the certainty it provides, particularly if you know you can afford the monthly repayments at the rate you have agreed. The downside is that if interest rates fall lower, you will miss the benefit of this.

Variable home loan

A variable home loan rate means the interest rate changes and can move up or down. This means a loan can become more expensive if interest rates go up, but more affordable if interest rates fall. With a variable home loan, there is often no limit on additional payments, meaning you have the choice to pay down the loan faster if it suits you. Offset accounts, which allow you to keep your spare cash sitting in the loan and reduce your monthly repayments are also usually associated with variable home loans and not with fixed rate home loans.

Split home loan

You guessed it! A split home loan is a combination of a fixed home loan and a variable home loan. Once the fixed home loan component period ends, it reverts to a variable home loan.

What are the advantages of a split home loan?

By being able to repay the variable component of the split home loan early, it may suit some to have part of a home loan variable interest to be able to take advantage of improved cashflow. Perhaps you are expecting a windfall from selling another asset,  an inheritance, or maybe you will receive a bonus from work. Any of these amounts can be used to pay down the variable part of the loan. Another possible advantage of a split home loan is by keeping some of the loan fixed, you are protecting yourself from the possibility that interest rates start to increase, as part of the loan will have a fixed monthly repayment attached.

Possible risks of taking a split home loan

One possible risk with the fixed part of the home loan is that there are likely to be additional costs if you repay this earlier than the fixed rate term. For example, if you sell the property soon after buying it, you may need to pay penalties associated with ending the fixed component of the loan early. If you are expecting to flip a property, a split loan or a fixed loan may not be suitable for you. Another possible downside is you may not have the choice to have an offset account. This means the interest you could save by having extra funds sitting in the loan account may not be possible with this loan type.

The moral of the story

Different loan types will suit different buyers with different expected cashflows and interest rate expectations. There is no one right answer, nor is there one incorrect answer. Try to establish what you can afford to pay and consider what may happen if interest rates were to increase and how this may impact your ability to repay a home loan.

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Buying property is one of the biggest money decisions you’ll make in your life, so put in the work to get it right. Get good help around you so you cover all your bases and can confidently buy property knowing you’re on the right track from the moment you make your purchase! If you would like to find out more about Raiz Home Ownership, please contact the team at home@raizhomeownership.com.au, or register your interest.

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Important Information If you have read all or any part of our email, website, or communication then you need to know that this is factual information and general advice only. This means it does not consider any person’s particular financial objectives, financial situation, or financial needs. If you are an investor, you should consult a licensed adviser before acting on any information to fully understand the benefits and risk associated with the product. This is your call but that is what you should do. You may be surprised to learn that RAIZ Invest Australia Limited (ABN 26 604 402 815) (Raiz), an authorised representative AFSL 434776 prepared this information. We are not allowed, and have not prepared this information to offer financial product advice or a recommendation in relation to any investments or securities. If we did give you personal advice, which we did not, then the use of the Raiz App would be a lot more expensive than the current pricing – sorry but true. You therefore should not rely on this information to make investment decisions, because it was not about you for once, and unfortunately, we cannot advise you on who or what you can rely on – again sorry. A Product Disclosure Statement (PDS) for Raiz Invest and/or Raiz Invest Super is available on the Raiz Invest website and App. A person must read and consider the PDS before deciding whether, or not, to acquire and/or continue to hold interests in the financial product. We know and ASIC research shows that you probably won’t, but we want you to, and we encourage you to read the PDS so you know exactly what the product does, its risks and costs. If you don’t read the PDS, it’s a bit like flying blind. Probably not a good idea. The risks and fees for investing are fully set out in the PDS and include the risks that would ordinarily apply to investing. You should note, as illustrated by the global financial crisis of 2008, that sometimes  not even professionals in the financial services sector understand the ordinary risks of investing – because by their nature many risks are unknown – but you still need to give it a go and try to understand the risks set out in the PDS. Any returns shown or implied are not forecasts and are not reliable guides or predictors of future performance. Those of you who cannot afford financial advice may be considering ignoring this statement, but please don’t, it is so true. Under no circumstance is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz Invest or Raiz Invest Super. This information may be based on assumptions or market conditions which change without notice and have not been independently verified. Basically, this says nothing stays the same for long in financial markets (or even in life for that matter) and we are sorry. We try, but we can’t promise that the information is accurate, or stays accurate. Any opinions or information expressed are subject to change without notice; that’s just the way we roll. The bundll and superbundll products are provided by FlexiCards Australia Pty Ltd ABN 31 099 651 877 Australian credit licence number 247415. Bundll, snooze and superbundll are trademarks of Flexirent Capital Pty Ltd, a subsidiary of FlexiGroup Limited. Lots of names, which basically you aren’t allowed to reproduce without their permission and we need to include here. Mastercard is a registered trademark and the circles design is a trademark of Mastercard International Incorporated. Home loans are subject to approval from the lending institution and Raiz Home Ownership makes no warranties as to the success of an application until all relevant information has been provided. Raiz Home Ownership Pty Ltd (ABN 14 645 876 937), an Australian Credit Representative number 528594 under Australian Credit Licence number 387025. Raiz Home Ownership Pty Ltd is 100% owned by Raiz Invest Australia Limited (ABN 26 604 402 815).

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