With the increasing modernisation of the home loan market, lenders are coming up with more home loan product options to fit their clients needs. From different pricing structures to features, the wide variety of home loan products means that more than ever its important to get specific advice from a finance professional on the best product for you. Here’s a break down of the main types of home loan products available in the market:
Variable Home Loans
The most common form of loan product, variable home loans have an adjustable variable interest rate which goes up and down based on the home loan markets pricing. Generally the interest rate changes are at the discretion of the lender who may follow Reserve Bank decisions and changes in the cost of funding of loans, or they can increase or decrease their interest rates more to encourage new customers to use their products or to restrain the number of new customers.
Some lenders also will peg their changes in interest rates exactly to Reserve Bank changes, or will follow a ‘basket’ of lenders changes to show that they’re following the market. Speaking with the team at Precision Funding– they note that around 70% of all loans in Australia are variable home loans and generally will on average represent the most cost effective lending option for borrowers.
Fixed Home Loans
In contrast to variable home loans, fixed loans provide a fixed period wherein the interest rates cannot change, providing certainty in the repayment amount. Fixed periods can be from 1-15 years dependent on the lender, however the most common options are for 1-3 years, with 5 year fixed terms also becoming more popular. During a fixed period, whilst a lender cannot change the interest rate, its important to note that this also means that the customer is locked in too. If interest rates fall below the rate offered by the lender for variable loans, the customer is effectively ‘losing’ by paying a higher cost than they otherwise would. The best way to consider a fixed loan is a tool which can provide you with a certainty of repayment amount if your budget is sensitive to any increase in costs, than a means of guessing how interest rates will trend in the future.
Split Home Loans
A combination of the above, a split home loan can be ‘split’ into multiple loan accounts with a mixed of variable and fixed components. This can help customers provide certainty of repayment amount for most of their debt whilst retaining a variable portion where they can make unlimited repayments, attach offset accounts etc. Split home loans can sometimes also be used to hedge against interest rates where low fixed rates are offered in the market, so in case of further variable drops they benefit from the variable component reducing in rate, whilst in the case of rises the fixed rate is an effective saver.
Finding the right loan product for your situation requires thought into your immediate and future plans, budget and eligibility. It’s recommend you speak with a mortgage broker who will be able to help you understand the options available and compare multiple products to find the most suitable option.