Choosing an interest rate for your home loan

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Everyone knows that choosing a property to buy can be a challenging and long process, however, choosing the best home loan to pay for it can also be a tedious task. One key thing you’ll have to look at is the type of interest rate that will suit you and your financial goals.

The interest rate you’ll have to pay on your home loan varies among home loan providers. While the rate can seem like a small percentage, even a tiny difference in interest rates can significantly affect the amount of interest you’ll have to pay as home loans are long-term. There are three main types of interest rates.

Variable-rate home loan:
A variable-rate home loan has an interest rate that is dependent on the Australian economy and the official cash rate of the Reserve Bank of Australia. This can be risky as the minimum repayment amount can rise or fall at any time and you could end up paying more than a fixed-rate home loan. It also makes it harder to plan and predict the payments you’ll have to make.

However, those with a variable-rate home loan often safe money with interest rate drops. A variable-rate loan also offers you more flexibility with your loan, such as being able to make extra repayments or switching loans at any time with minimal costs.

Fixed-rate home loan:
A fixed-rate loan provides you with the same interest rate for a set period of time, generally between one to five years. Once the fixed-rate period has ended, the loan will then go to a variable-rate. A fixed-rate loan allows you to have certainty of your repayments over the fixed term, making it easier to plan and budget around the monthly payments.

While a fixed-rate may be preferable to some, it’s main disadvantage is inflexibility. If you end up refinancing your loan or selling your property during the fixed term, then you may have to pay a break fee, legal fee and settlement fee.

Split-rate home loan:
A split-rate loan allows you to divide your loan into two parts, where a fixed interest rate will be applied to one part and a variable rate is applied to the other. This type of interest rate gives you the flexibility of a variable loan, as well as the security of a fixed loan.

There is generally no limit as to how the loan can be divided. The way you decide to split your loan between a variable-rate and a fixed-rate is up to you.

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