Once you decide you need a home loan to fully finance your real estate purchase, it’s easy to get overwhelmed by all the options you see in front of you. How much of the price of your home will you pay out of pocket, and how much will you need in the form of loans? And as for your loans, what sort of interest rates are you expecting to pay?
The questions can be complicated, especially if you’ve never done this before. But with a little creativity, you can find the best possible borrowing strategy for your financial situation.
That strategy may well involve a “split” loan that includes both fixed and variable interest rates.
How a split loan works
As you’re carrying out a home loan comparison, you’ll likely be weighing the pros and cons of fixed and variable interest rates. According to the Australian Securities and Investment Commission (ASIC), an increasingly popular option these days is a split loan, which let’s you pay a fixed rate on one portion of the amount you owe, then a variable rate on the rest.
ASIC provided a case study of one couple who split their $500,000 loan into $350,000 on a fixed rate of 7% and the remaining $150,000 on a variable rate of 7.4%. Because interest rates kept going up, they had saved $220 per month by locking in that fixed rate for as long as they could afford. Of course the reverse is true. If interest rates go down, you could end up paying more for your fixed rate portion of your loan.
Fixed loans have a maximum additional amount you are able to pay off the loan, and carry exit fees, should you decide to get out of your fixed rate before the term has expired. These two factors need to be considered when fixing an interest rate on your home loan.
Weighing up your long-term needs
So how will you split up the rates on your mortgage repayments? How much of a fixed rate can you swing, and how much can you let slide into variable territory?
It all depends on your financial needs. The benefit of a fixed rate is it offers security. If you’ve got to deal with big expenditures in your future, like paying tuition at a university, you might benefit from a more stable loan repayment.
On the other hand, variable rates can be more flexible. If you’ve got unstable sources of income and you want the freedom to make additional payments as you see fit, you might want more of your rate to be malleable.
Figuring out the details of your home loan can be complicated, which is why it’s often wise to turn to the professionals. So give us a call today!