Why Should You Understand Fixed, Variable & Split Loans?

Understanding Your Home Loan Options

When you're ready to apply for a home loan, one of the most important decisions you'll make is choosing the right interest rate structure. Whether you're pursuing your first home loan or refinancing your current home loan, understanding the differences between fixed rate, variable rate, and split loan options can significantly impact your financial stability and ability to achieve home ownership.

For Richmond residents looking to invest in property or secure their future through home ownership, AXTON Finance provides access to home loan options from banks and lenders across Australia. Let's explore each loan type to help you determine which home loan product aligns with your financial goals.

Fixed Rate Home Loans Explained

A fixed interest rate home loan locks in your interest rate for a predetermined period, typically ranging from one to five years. During this time, your repayments remain consistent regardless of market fluctuations.

Key Home Loan Benefits of Fixed Rates:

• Predictable repayments make budgeting straightforward
• Protection against interest rate increases during the fixed period
• Peace of mind knowing exactly what your repayments will be
• Helpful for owner occupied home loan purposes when household budgets are tight

Considerations:

• Limited flexibility to make extra repayments without penalties
• You won't benefit if interest rates decrease
• Break costs may apply if you exit the loan early
• Some home loan features like offset account access may be restricted

Fixed rate home loans suit borrowers who value certainty and want to protect themselves from potential rate increases. If you need lower repayments locked in for the short to medium term, this option provides financial predictability.

Variable Rate Home Loans Explained

Variable home loan rates fluctuate based on market conditions and lender policy changes. Your interest rate can increase or decrease throughout the life of your loan, directly affecting your repayment amounts.

Key Home Loan Benefits of Variable Rates:

• Flexibility to make unlimited extra repayments
• Access to features like a linked offset or mortgage offset account
• Potential to benefit from rate discounts and interest rate decreases
• Usually includes portable loan features if you move properties
• Helps build equity faster through additional repayments

Considerations:

• Repayments can increase if rates rise
• Less predictability for household budgeting
• Requires monitoring of current home loan rates

Variable interest rate loans appeal to borrowers who want flexibility and the ability to pay off their loan amount faster. The offset account feature can reduce the interest you pay by offsetting your loan balance with savings, which helps improve borrowing capacity for future investments.

Split Loan Options: The Hybrid Approach

A split loan divides your loan amount between fixed and variable portions, offering a balanced approach that combines the advantages of both structures. You might choose to split your loan 50/50, 60/40, or any ratio that suits your circumstances.

Key Home Loan Benefits of Split Loans:

• Balanced risk management across rate movements
• Partial protection from rate increases
• Maintain some flexibility for extra repayments on the variable portion
• Access to home loan features like offset accounts on the variable component
• Ability to compare rates between different structures

How Split Loans Work:

For example, on a $600,000 loan, you might fix $300,000 at 6.2% for three years while keeping $300,000 on a variable rate at 6.5%. This means half your repayments remain stable while the other half adjusts with market conditions. You can still make extra repayments on the variable portion to build equity without penalties.

Split loans particularly suit borrowers who want to hedge their position. Richmond residents planning to invest in property while maintaining an owner occupied home loan might find this structure allows them to manage both obligations effectively.

Choosing Between Interest Only and Principal and Interest

Regardless of which rate structure you select, you'll also need to decide between interest only and principal and interest repayments.

Principal and Interest Loans:

• Each repayment reduces your loan amount
• Builds equity consistently
• Lower overall interest costs
• Standard choice for owner occupied home loans

Interest Only Loans:

• Lower initial repayments (interest only period typically 1-5 years)
• Loan amount remains unchanged during interest only period
• Often used for investment properties
• Transitions to principal and interest after the initial period

Calculating home loan repayments for both structures helps you understand the long-term cost implications and impact on your loan to value ratio (LVR).

Factors to Consider When Selecting Your Home Loan Product

When comparing home loan packages and determining the right structure, consider:

1. Your financial situation: Stable income favours fixed rates, while irregular income might benefit from variable flexibility
2. Market conditions: Research current home loan rates and economic forecasts
3. Loan purpose: First home loan needs differ from investment or refinancing goals
4. Future plans: Will you need to access equity or make lump sum repayments?
5. Risk tolerance: How comfortable are you with repayment fluctuations?
6. LMI considerations: Understanding Lenders Mortgage Insurance (LMI) costs at different LVR levels

Those looking to compare rates can use online tools to understand how different structures affect their repayments. Additionally, obtaining Home Loan pre-approval provides clarity on your borrowing capacity before committing to a specific loan structure.

The Richmond Property Market Context

Richmond's vibrant property market presents unique opportunities for buyers and investors. Whether you're looking to secure your future in this inner-city Melbourne suburb or expand your portfolio, understanding your home loan options empowers you to make strategic decisions aligned with your property goals.

For Richmond residents, working with a local mortgage broker who understands the area's property dynamics can provide valuable insights into which home loan structure best suits your circumstances.

Rate Discounts and Ongoing Management

Many lenders offer interest rate discounts based on factors like:

• Loan amount size
• LVR percentage
• Professional occupation status
• Existing banking relationships
• Package combinations

These rate discounts can significantly affect your home loan interest rate and overall borrowing costs. After securing your home loan, consider using a Fixed Rate Expiry Calculator to plan ahead if you've chosen a fixed rate option, ensuring you're prepared when your fixed period ends.

Regular reviews of your loan structure help ensure you continue to access the lowest rates available and maintain home loan features that match your evolving needs.

Making Your Decision

There's no universal answer to which loan structure is optimal. Your choice depends on your unique financial circumstances, risk appetite, and property goals. Some borrowers prioritise stability, others value flexibility, and many find the split loan approach provides the right balance.

What matters most is making an informed decision based on thorough comparison of home loan products, understanding the home loan features available, and considering how each option supports your path to achieve home ownership and financial stability.

Whether you're exploring your first home loan, looking to refinance, or planning to invest in property, understanding these fundamental differences between fixed, variable, and split loan options positions you to select the home loan package that works for your Richmond property journey.

AXTON Finance specialises in helping Richmond residents access home loan options from banks and lenders across Australia, ensuring you find the right home loan product for your needs. Call one of our team or book an appointment at a time that works for you to discuss which loan structure aligns with your property and financial goals.