What’s the difference? Home loan variations explained

10.9.13Homes loans are one of the most essential aspects of purchasing property. Without one, you would need to save up the entire value of a property and make one, swift payment – something that would be nigh on impossible for most Australians during their lifetimes.

However, just as there are differences between individuals buyers or the properties they’re looking at, there are a number of differences between the varying home loan types available.

The biggest question for those approaching the real estate market for the first time is simply, which home loan type is best suited for me? Taking the time to do some research and figure out how you fit into the market will help to make your entire property purchasing experience easier in the long run.

Variable Rate Home Loans

One of the more popular home loan options available in Australia is what is referred to as a variable rate home loan.

Because home loans and borrowing in general are based on the movements of the economy, any fluctuations in the market will affect home loans in a number of ways.

A variable rate home loan means that your repayments are affected by changes to your lender’s interest rates, which are in turn affected by the economy and the official cash rate set by the Reserve Bank.

What this means is that as their interest rates begin to decrease, so too does your repayment amount. While this may seem like a fantastic perk, it would pay to remember that the opposite is also true – if interest rates begin to rise, so too will your repayment amount.

Fixed Rate Home Loan

This type of loan is the exact opposite to a variable rate. Rather than depending on the whims of the market, a fixed rate loan will retain a constant interest rate for a set period of time while you make your repayments.

This means that, regardless of what happens in the market, your loan will be secure and your repayments will remain the same for the duration of your fixed period.

Fixed rates are great for buyers looking for stability in their repayments, and those who don’t want their repayments amounts to change each month. While this may mean missing out on lower repayments through market fluctuation, it could be worth investigating in the long run.

Split Loan

If you would like to take advantage of the facilities for both a fixed and variable rate home loan, you could investigate the possibility of obtaining a split loan.

The basic concept is to split your home loan into different portions, which each have a different home loan type/repayment criteria.

Of course, these complications are worth sitting down with a mortgage expert and discussing the options available to you before committing to any one home loan option.

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