A Guide to Key Decisions
1. Fixed vs Variable Rate Loans
Fixed Rate Loan
A fixed-rate loan locks in an interest rate for a set period, typically 1 to 5 years.
- Advantages:
- Predictable repayments during the fixed term.
- Protection from interest rate increases during the fixed period.
- Considerations:
- Limited flexibility (e.g., restricted extra repayments).
- If interest rates drop, you won’t benefit from lower rates during the fixed term.
Variable Rate Loan
A variable-rate loan means the interest rate can change over time, often in response to market conditions.
- Advantages:
- Potential to benefit from rate decreases.
- Greater flexibility (e.g., extra repayments, redraw facility).
- Considerations:
- Monthly repayments can fluctuate, making budgeting less predictable.
- Vulnerable to interest rate increases.
Combination Option
Some lenders offer split loans, where part of the loan is fixed and part is variable. This approach combines stability and flexibility.
2. Interest-Only vs Principal and Interest Repayments
Interest-Only Repayments
For a set period (commonly 1–5 years), you only pay the loan’s interest.
- Advantages:
- Lower repayments during the interest-only period.
- Frees up cash flow for other priorities (e.g., investments, renovations).
- Considerations:
- Does not reduce the loan balance.
- Once the interest-only period ends, repayments will increase.
- Total interest paid over the life of the loan may be higher.
Principal and Interest Repayments
Repayments cover both the loan’s interest and a portion of the principal (the amount borrowed).
- Advantages:
- Reduces your loan balance over time.
- May lead to lower total interest paid across the loan term.
- Considerations:
- Higher repayments compared to interest-only during the same period.
Final Thoughts
Each of these options has distinct features that can align differently with individual financial situations and goals. Understanding these choices and discussing them with your mortgage broker or financial adviser can help you identify the structure that best suits your needs.
Making informed decisions today can set you up for greater financial confidence tomorrow.’
Provided by Westlend broker – Alex Getley