Home loan products and interest rates - Jessica Arabia, Finance Prospects

When it comes to home loans you will find there are different types of loan products as well as different types of interest rates on offer, each dependent on specific lenders at the present time. You will find below an outline of the different types of interest rates on offer, each having their own advantages and disadvantages. It is important to speak to your experienced mortgage broker about what option is the most suitable for your situation.

Fixed Interest Rates

A fixed interest rate home loan is a loan product that lenders have on offer where the interest rate is locked in for a set period of time usually between 1 and 3 years – however this can be fixed for up to 10 years, although the rate offered is far from being a cost effective option.

If you choose to go with a fixed interest rate home loan your mortgage broker will offer you what is called a rate lock ensuring you get the desired interest rate. This is an added cost you as the client will need to pay for, depending on the lender this can be a flat fee, or a percentage of your home loan. It is up to you if you take on board the rate lock, although should you not choose to get a rate lock and the interest rate goes up between loan application and loan settlement you will have to accept the new interest rate.

Once the fixed term of the loan comes to an end, if you or your mortgage broker have not have not taken any action to re-fix or refinance the loan this will automatically switch to the standard variable rate offered by the lender at the present time. Providing you have yourself a good mortgage broker on your side there won’t be any need for you to worry as they will more than likely be in touch with you prior to the fixed rate coming to an end to see what is the next best step forward for you and your overall situation.

Fixed rate advantages:

·         If interest rates rise this change will not affect your current repayments.

·         The monthly repayments will be a specific amount for a set period of time depending on the fixed rate period so you have the ability to plan ahead with confidence.

Fixed rate disadvantages:

·         If variable interest rates drop below what your fixed interest rate is you will not see a benefit.

·         Additional home loan repayments are capped at an annual amount.

·         A redraw facility in many cases is not available on a fixed rate loan.

·         If you refinance or pay out your loan facility before the fixed rate period ends, a break fee is payable.

Variable Interest Rates

A variable interest rate home loan is a loan product that lenders have on offer where the chosen interest rate is not locked in like a fixed rate loan and with this being the case it means the interest rate can rise or fall over life of the loan. As a result of this being the case, as the interest rate change takes affect the repayments may also vary if you are paying the minimum amount.

The variable interest rates that are on offer at time of a loan application being submitted can in some cases have a different outcome at time of the loan settling as it may be higher or lower than what the comparison fixed rate products on offer are.

Variable rate advantages:

·         Extra repayments can save on interest and assist you with paying off your home loan in a timely manner.

·         Ability for unlimited redraws on any additional repayments made onto the home loan.

·         An offset account can be set up, and in some cases lenders will have the ability to offer multiple offset accounts.

·         Variable loans will not incur any break fees should you refinance or pay out the loan facility early like a fixed rate home loan.

Variable rate disadvantages:

·         It can be difficult to budget with confidence knowing loan repayments can increase when interest rates change.

·         If you aren’t prepared when a rate rise comes into effect, there may be trouble keeping up with repayments.

Split Rate Loans

If you are unsure about whether you would like a fixed rate or variable rate home loan, another option might be to consider having your loan part fixed and part variable – otherwise known as a split loan. Depending on your overall situation as far as income and assets go a split rate home loan might be an ever perfect fit for you as will allow you to manage some of the risks associated with potential interest rate rises while still being able to make lump sum extra payments onto your home loan each year.

When it comes to having a split rate loan there are no rules or guidelines to say how the loan should be split and what loan products are the best fit for you. Some examples you can do are have the loans split right down the middle at a 50/50 split or even a 80/20 split with the larger portion being at the lower fixed interest rate. At the end of the day the decision is up to you and how you want the finalised loans structured. If you are unsure whether this option is actually suitable for you don’t hesitate to pick your mortgage broker ’sbrain as they will be able to give can you advice on the best way to set up the loan splits.

No one can predict the future on how interest rates will rise or fall so it’s important to talk to and work with an experienced mortgage broker who will be able to assist with providing you with a home loan structure that is right for you. The loan product offered to you that you choose to accept is one that needs to work for you. The loan should have the features, flexibility and fees that are the most suited to your needs.

If you have any queries or a question regarding specific information around home loan products or home loans in general, don’t hesitate to get in touch with our friendly team on 08 8344 9933 or email Jessica at jessica@financeprospects.com.au to find out more about the options available to you.