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Types of home loans: Understanding fixed vs variable vs split

- October 7, 2021 3 MIN READ
Different types of home loans

For the thousands of Aussies looking for a new home loan, there has never been more choice. But with all the different types of home loans available, how can you determine which one best suits your financial situation?

When you take out a home loan, most providers will give you a choice between a fixed, variable or split home loan.

For those new to the home loan world, here’s a breakdown into the difference between these options and how they benefit Aussies.

Lock it in: what’s a fixed-rate loan?

A fixed-rate home loan has a defined, unchanging interest rate during the fixed rate term.

This can give you peace of mind that the required repayment amount will be the same during the lifetime of the loan, or at least for the nominated fixed-rate term. Not only does this help you stick to your budget, but it can also protect you from potential interest rate rises.

Most providers often allow you to pick your ideal period that you would like to fix your interest rate to. It’s generally anywhere between one to five years and depends on the total amount borrowed and your loan term.

In most cases, at the end of the fixed term your loan will instantly roll over to a variable rate (see below). You can, however, choose to repeat the process and re-fix your loan for another agreed period.

While there are plenty of upsides to a fixed-rate home loan, it’s essential to keep in mind that those locked in to a fixed term loan are unable to gain access to a reduction in interest rates.

A fixed-rate loan also doesn’t give you the flexibility to make additional repayments above the required amount, should you wish to pay off your mortgage faster.

Mix it up: what’s a variable home loan?

A variable home loan has an interest rate that is susceptible to fluctuations at any given time. This means your monthly repayments may vary to month-to-month depending on whether the interest rate rises or falls.

Unlike fixed-rate home loans, a variable home loan typically offers you more flexibility in terms of making unlimited additional repayments. You can also add on loan features such as an offset account or redraw facility, as well as refinance your loan with ease.

The risk involved with variable home loans is often what turns some people off picking this option. As interest rates shift so frequently, this can often lead to many borrowers experiencing high levels of mortgage and financial stress.

In addition to this, many loan providers are able to shift their own interest rates, completely independent from any Reserve Bank of Australia decision. In some cases, this can be excessive.

Split it up: what’s a split home loan?

A split home loan is when you divide your loan into multiple parts. This essentially allows you to nominate a portion of the loan to have a fixed interest rate and the remainder a variable interest rate.

For those who can’t decide between a fixed or variable home loan, this is usually the best option as they can get the best of both worlds.

When it comes to advantages for split loans, there are plenty. Split loans allow you to have rate and repayment certainty on one portion of your borrowing. You can also decide how much of your loan that you want to take as a fixed rate and how much you want as a variable rate.

There are some drawbacks when it comes to split home loans, including the fact that you may still be ineligible to pay back your loan early. This is because 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 some hefty penalties for early repayments.

It’s important to note, that there may also be some additional fees for managing both accounts. So in order to avoid any unexpected traps, it’s a good idea to check the terms and conditions with your provider before making any decisions.

Looking at the three types of home loans, all in all, the choice is always up to individual preferences. When comparing types of home loans, it’s a good idea to consider what you can realistically afford and what your appetite is for paying back the loan before making a decision.