I get asked the question often by clients “should I have a fixed, variable, interest only or principal and interest loan?” The Home Loan Company can help you decide. Spring is usually the busiest time for buying property. Be prepared with your finances and get your loan pre-approval before you start looking for a property so you know exactly where you stand. Generally all you need to do then is provide the property details to complete the loan.
Choosing a variable interest rate option usually gives you the flexibility to pay more off your loan principal to reduce the interest charges at any time without incurring Break Costs. Depending on the loan product you can redraw to access your funds and importantly your offset account, if you have one, which can be effective. The variable rate has historically been preferred and certainly if you had fixed your rate 12 months ago for 3-5 years you would still be behind as 3 year rates were around 7% and 5 year rates 7.25% at the time.
Interest only loans are popular with investors as it allows investors to claim maximum tax deductions. Also by paying only interest, less of your cashflow is tied up servicing the loans and can therefore be used for other purposes. This can firstly be towards your highest non-deductible debt (such as your home loan or credit cards) and then to deductible debt (including investment loans).
Some fixed rate loans offer partial or full offset but this is rare and you need to check. The key benefit of going fixed is to protect you from excessive rate rises beyond your capacity to pay but you will usually pay more interest straight away. The interest rate curve has changed a little in the past year but you’ll still be paying more interest straight away for the fixed rate with the usual uncertainty as to where rates will go and how fast they will move. However, make sure your loan has the ability to fix quickly as there will be times when fixing a portion of your loan is necessary or desirable even for short periods.
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