Spring is the season for change and new beginnings, even in the world of home loans.
This time of year is ‘mortgage season’, when we see lenders at their most competitive due to the higher number of property hunters on the market. This is especially true this year following the string of cash rate decisions from the Reserve Bank, keeping the cash rate at an all-time low of 2.50 percent.
But now, experts agree that a rate rise is drawing closer.
In the nation’s biggest monthly Reserve Bank Survey, the cash rate is expected to rise by mid next year. So, what does this mean for you?
If you are considering buying your first home, now is a good time to do it.
The current market conditions mean it’s important to choose a loan that’s going to support you as a first-home buyer, as well as let you take advantage of today’s favourable cash rate.
Every type of home loan will have its own strengths and restrictions, and unfortunately there’s no golden rule that will apply to everyone’s situation.
For borrowers, it’s especially crucial to make sure you know areas of your home loan that provide you a bit of elbow room – for example redraws, additional repayments and the like.
Here’s a guide to the most common types of home loans, and the assumptions they all carry with them. Weighing up the features and restrictions listed for each loan type alongside your current financial standing is the first step to ensuring your family can truly call your house a home:
With the cash rate at a record low, fixed rates are looking more attractive as you can lock in a competitive rate for a number of years.
Fixed rate loans come with several benefits. For one, having set repayments can help you budget, and you can lock in a competitive rate for a period as long as 15 years.
Although, keep in mind they also come with several restrictions. For instance, you often can’t make additional repayments during the fixed rate period and you are also likely to have to pay break costs if you decide to refinance during this period.
You also might not have access limited with offset accounts, redraw facilities, or other features that come with most variable rate loans.
If you decide to take advantage of a fixed rate loan, it might be a safe bet to go for a smaller fixed rate term, say less than three years. This way, if you’re unhappy with the loan you have less time to wait to refinance following the fixed period.
Variable rate loans, while usually offering you features that can help you save – including offset accounts, additional repayments, redraw, and no early repayment fees – also come with no guarantee of interest rate stability.
If we’re in favourable market conditions, like we are at the moment, this won’t seem too much of a problem. But it’s when rates start to rise that you’ll feel the sting, so if you are looking at variable rate loans it may be worth saving up a bit extra for a buffer.
Lenders change their rates to respond to the RBA’s cash rate changes, so you can bet when the cash rate rises, the majority of lenders will raise their rates.
Split loans allow you to divide your loan between a fixed and variable rate loan, often a 50/50, 60/40 or 70/30 split however, many lenders allow several splits with the one loan such as a portion variable, a portion fixed for two years and another portion fixed for three.
Ultimately, you decide how much you want to put towards each section of your loan.
A split loan lets you take advantage of the benefits of each type of loan; protecting the fixed rate portion of your loan from rate rises and returning lower repayments on the variable portion if the rate drops.
Split loans give you the best of both worlds, by being able to use features often not afforded to fixed rate loans, including offset accounts and the ability to make additional repayments.
All home loan types have noteworthy strengths and restrictions, but ultimately how they’ll work out comes down to your current financial standing – this is why comparing loan options is crucial when entering the market.