These days there are plenty of options for setting up your loans to make it work best for you and your situation.
A fixed rate is where a set interest rate is applied to the loan for an agreed term (usually 1, 3 or 5 years). Regardless of any interest rate changes, the principal and interest repayments will remain the same for the agreed term. This is very appealing for individuals that like to budget as the repayment amount remains consistent.
This is often recommended for people new to residential home loans so that payments can be clearly budgeted for while new homeowners are adjusting to the responsibilities of owning a house and having to make ongoing payments to the bank along with living expenses.
A variable rate, also referred to as a floating rate, means that the interest rate fluctuates with changes to market interest rates. As a result, your repayments will fluctuate as the rate changes. This loan option is preferred by individuals that are interested in making additional loan repayments and that would also like an offset account (our preferred option).
Splitting your loan, allows you to have a portion fixed and a portion variable. The advantage of this is managing the risk as well as having the ability to have an offset account or make extra repayments. You can generally choose what portions you would like to split, for example 50/50 or 30/70, you can choose.
The correct setup of loans is critical to tax planning and needs to be done correctly from the start otherwise thousands of dollars in deductible interest can be lost – not to be recovered unless the asset underlying the loan is sold and refreshed.
We strongly recommend anyone applying for loans for a new home or investment property to meet with us before the loans are created to ensure the correct setup for your situation.