When buying your first home, selecting the right type of home loan can be overwhelming. With options like variable, fixed, and blended (or split) loans, it’s essential to understand what each one offers to determine which best suits your financial situation and future plans. In this post, we’ll break down the pros and cons of each loan type to help you make an informed decision.

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Variable Rate Loans:

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What It Means:A variable interest rate on a home loan can change over time based on the economy and market rates set by the Reserve Bank of Australia (RBA).

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Pros:

1. Flexible Repayments:
   • You can make extra repayments without penalty, helping you pay off your loan faster.
2. Redraw Facility:
   • You can access extra repayments if you need the money later.
3. Offset Accounts:
   • You can link an offset account to reduce the interest you pay. Note that offset accounts often come with additional fees.
4. Easier to Switch:
   • Generally easier to switch loans or lenders if you find a better deal.

Cons:

1. Rate Fluctuations:
   • Your repayments can increase or decrease, making it harder to budget.
2. Market Dependent:
   • If interest rates rise, so do your repayments.

Best For:Borrowers who want flexibility and are comfortable with their repayments potentially changing over time.

Fixed Rate Loans:

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What It Means:A fixed interest rate loan has an interest rate that stays the same for a set period, usually between 1 to 5 years.

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Pros:

1. Predictable Repayments:
   • Your repayments stay the same during the fixed period, making budgeting easier.
2. Protection Against Rate Rises:
   • If interest rates go up, your rate remains unchanged.

Cons:

1. Less Flexible:
   • Often no redraw facility or offset account, or these features come with restrictions.
2. Break Costs:
   • Exiting the loan early can incur significant fees.
3. Rate Lock Costs:
   • Locking in a rate before the loan starts can incur an additional fee.

Best For:Borrowers who prefer stability and predictability in their repayments and want to protect themselves from potential interest rate increases.

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Blended or Split Loans:

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What It Means:A blended or split loan divides your mortgage into a fixed rate portion and a variable rate portion, allowing you to enjoy the benefits of both loan types.

Pros:

1. Balance of Flexibility and Stability:
   • You get the stability of fixed repayments and the flexibility of variable repayments.
2. Extra Repayments:
   • You can often make extra repayments on the variable portion.
3. Offset and Redraw:
   • You can still have access to offset and redraw facilities on the variable part.

Cons:

1. Complexity:
   • Managing two different loan types can be more complicated.
2. Potential Costs:
   • You may incur additional fees for maintaining both loan types.

Best For:Borrowers who want to hedge their bets, enjoying both the predictability of fixed rates and the flexibility of variable rates.

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Not sure which loan type is right for you?

Every situation is unique, so feel free to reach out for a no-strings-attached chat to talk about your specific needs.

jane@justrightlending.com.au

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