Setting Up Your Home Loan To Be Part Fixed and Part Variable- Points For Best Financial Outcomes

Finance Graphic

I realize this is a regularly discussed issue here in Australia, and I am relatively certain, in many other countries. In fact, in Australia, home ownership is one of the nation’s great dreams and is frequently discussed over the dinner table. While some European banks may be quite rigid still in the way they do things, the flexibility of loan structures in Australia is quite considerable and the competition between banking groups is fierce. Hence, there are some benefits fr the average consumer and I hope to assist with my take on these issues on the use of fixed and variable rates.

 

Benefits of Fixed Rates

Some people like the absolute certainty of fixed rates which is fine, but when the market is potentially still falling, in terms of the rates of loans potentially going down in percentage rates, it is wise not to lock all your eggs int one basket. Then again, if you are the kind of person who just wants absolute certainty, then fully locking might indeed be the way for you. However, it is good to have some flexibility with variable rates in a falling market because then, even though you can have a full guarantee of not paying more on part of the fixed part, you can benefit from reduced rates on the variable bit.

Naturally, in a rising market place of increasing interest rates, the fixed way is the way to go, but if you leave some section of your loan variably set, you can make additional payments over a threshold amount if you wish and not suffer a penalty. Most extra payments on a fixed mortgage can be no more than $10,000 per year, typically, but this will vary from bank to bank. In so,me European markets, you may only be able to make additional payments once every three months, after a prior arrangement with the bank, so it is wise to check these points.

Variable Rates

 

Without doubt, in a market where the rates are falling, the variable method is the way to go. Of course, there can be risks if the rates go up markedly, and as I think I may have made clearer earlier on in this article, my general view is that it can be beneficial to go with a part variable and a part fixed set up so as to have the best of both worlds.

 

Regardless of your decision, always make sure that you can affords to repay your obligations even if the rates were to go up as much as 3% more as this way, you will have built in enough buffer to cover yourself which is always a great form of personal insurance for financial health and comfort.

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The Current Property Market and The Need To Save As Much As Possible

While the article below is intended as a general point, regardless of your exact loaction, I can confirm that in Sydney, Australia, the prices of property have been rising very highly, and in my view, are reaching a point where they are likely to leave quite a lot of pain witgh the prople who have leveraged to the maximum, and found that there is very little left to work with as and when the cost of loans goes up.

 

While rates for loans have been hostirically low, there is a clear indication from history that rates will at some time rise and I am not sure if all the households out there are ready for it.

Some people are even looking at options liek buying homes further out of town and commuting into the city centres.

This is something that I did some time ago, and the article on the economies of commuting is here for your reference from the Sydney Morning Herald.

While there are certainly some benefits in having a slightly cheaper house when you are living away from work, you do need to factor in the cost of transportm, time and the like.

 

I think however, that a few years ago, some lending practices, in my view, were a little loose and we are starting to see a return to the higher risk loans with little or no deposit, and people borrowing the maximum they can afford to repay now. Of course, when rates do go up, this will be very problematic, in that some people’s budgets may not make it to stretch further.

 

Of course, on a positive note, there are more people who have been utilizing the lower rates to get ahead on their mortgages and this is a very positive step.

 

I know that even of you have a higher rate mortgage, because you may have used a special loan to consolidate other debt into one loan, and have a slightly higher interest rate, it is really important to get in there and pay as much as you can in extra repayments.

 

These will help to provide a buffer when the times are leaner and also give you an added peace of mind which is priceless in my view.

 

Extra Repayments and Extra Deposit

 

It could be argued this is very basic information, but generally, the more you repay on your variable rate loan, the better off you will bem both from the point of view of paying down your debt sooner as well as managing to also build in a security buffer of extra repayments.

 

Even extra payments as little as ten doallars a week can make a difference over the life of a loan. If you make no further repayments on a loan set over thirty years, you will typically find the first seven years are just paying off the interest which is quite scary.

 

I wncourage you to make sure that you are always paying as much as possible off your loan for maximum benefit and ownership of your home.

 

 

 

 

 

 

Distance away from home

Some of the links in the post above are “affiliate links.” This means if you click on the link and purchase the item, we will receive an affiliate commission. Regardless, we only recommend products or services we believe will add value to our readers.