Low mortgage rates and rising property values have persuaded many people to buy their next house. You’ll want to understand the three types of house loans accessible to you whether you’re a first-time home buyer, planning a move, or trying to refinance your current home loan to save money.

Fixed-rate home loan

 A fixed rate house loan is one in which the interest rate is fixed and cannot be changed. This can be reassuring in volatile markets because your payments will remain unchanged even if the cash rate rises. Until the conclusion of the fixed rate term, you’ll always have the same amount owing each month. This simplifies the budgeting process.

This makes budgeting easy and can give borrowers a sense of security.

Fixed periods can run anywhere from one to five years, after which the rate will revert to a variable rate. A borrower has the option of entering another fixed rate period, although the interest rate will most likely be different.

The disadvantage with fixed-rate mortgages is that you can’t usually make extra payments, so if you get a raise or a windfall, you won’t be able to pay off your house faster and save money. Extra repayments on fixed rate loans are allowed by some lenders, although they are normally limited to a set annual amount.

You can’t readily refinance a fixed rate loan before it expires, unlike variable rate mortgages.

Another disadvantage of a fixed rate house loan is that it remains fixed regardless of market conditions. Only by going through the effort and expense of refinancing can you gain if rates decrease significantly.

Variable-rate home loan

Variable rate loans feature an interest rate that can vary at any time. This has a significant impact on your monthly payback amount. Your repayments will increase if your lender raises interest rates, and vice versa.

Variable rate mortgages, as opposed to fixed rate mortgages, usually provide a lot more freedom. You can make as many extra payments as you want, add loan features like an offset account or a redraw facility, and refinance with (relative) ease. Extra repayments have the potential to reduce the length of your home loan and save thousands of dollars in interest over time.

However, you must cope with interest rate fluctuations, which might put your mortgage in jeopardy, as well as changes in your repayment amount . One of the most significant disadvantages of variable interest rates is risk.

Split-rate mortgage

A split rate mortgage is made up of two loans: one fixed and one variable rate. Homebuyers can take advantage of both forms of financing with this combination. Rate spikes will affect one half of your loan, while rate drops will affect the other.

The biggest disadvantage of a split loan is that you might not be able to repay your loan early. The variable half of the loan will allow you to make more instalments to lower your interest rate, but the fixed portion will still penalize you if you pay off your loan early.

Fixed-rate, variable-rate, and split-rate loans all have advantages and disadvantages, and the best option for you will depend on your specific circumstances and needs. Is it more important to you to have the security of a fixed rate, or do you want the flexibility to make more payments to your house loan when your income rises?

Contact our Home Loan Specialists at Micah Finance Solutions to discuss your home loan needs with a professional. We can assist you in finding the best loan that meets your requirements. Book a call or email us at erik@micah.com.au