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As you begin your journey towards buying a property, you may find that raising capital is an important part of making your first purchase. Many Australians rely on mortgages to purchase their first property.
So, what types of home loans are available to you and best suit your needs? Should you go with a fixed, variable, or split interest rate loan?
Variable and fixed-interest loans
Over a period of time, the variable interest rates offered by a lender will fluctuate depending on a variety of economic factors. Sometimes they will drop, resulting in smaller repayments, but they can also rise.
This is the key difference between variable and fixed interest loans, and is likely to be a factor you’ll consider if you’re purchasing a property.
On the other hand, fixed-interest loans allow you to know exactly how much your repayments are going to be each month for a set number of years, regardless of what is happening in the economy. This means you are protected when interest rates rise, but the flip side of this is that you will not benefit if they fall. Once the fixed rate period ends, the loan usually converts to a variable rate and is subject to fluctuations as explained above.
Another available option is the split loan. This allows you to put some of your loan in a variable interest arrangement, and some on a fixed interest basis. A split rate loan could provide you more certainty in relation to repayments, but also offer some flexibility in the event the market changes.
Interest-only loans
Interest-only loans are becoming a ubiquitous type of loan among property investors, with more than half of new investment loan approvals over the last few years being of this type1. These loan arrangements usually require you to pay back only the interest over a set period of time, before converting to interest and principal repayments for the remainder of the loan term.
With an interest-only loan, your repayments are typically smaller for the interest only period, and then increase once the interest-only period ends and the principal is included in the loan repayment. You also would need to take into account the timing of fixed rate interest periods and their conversion into a variable interest rate.
It can be a complicated evaluation process when deciding how to structure your home loan, particularly if you are planning on purchasing a property in the very near future. Given this, consider consulting an expert to discuss options for structuring a mortgage for your unique set of circumstances.
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