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Ways to structure your home loan

The new year is just around the corner and we’ve already heard from a few people who are looking to buy a home in 2024. While interest rates are up, the cost of houses are down and there are deals to be had if you’re in the market for a house.

Of course, buying a home can come with a lot of stress and worry. It’s probably the biggest purchase you’ll ever make and many people second guess themselves. That’s why doing your research and having a clear understanding of what you’re getting yourself into is critical and understanding your home loan options is a big part of that

Types of home loans

Not all home loans are created equal and there are lots of different options available as well as different ways to structure your mortgage and repayments. The choice you make will likely be dictated by the mortgage term, interest rates, your ability to service the loan, and even how much you already have in the bank. Together, these factors affect how much the loan will cost you over time as well as how it fits into your lifestyle and long-term financial goals.

Fixed interest rate loan

As the name suggests, the interest rate and repayment amount for this type of loan remains the same for the fixed rate period agreed upon. The advantage of this is that you know exactly how much you will be required to pay on a regular basis until the fixed period comes to an end. At such time, you usually have the choice to refix the loan at another rate (generally whatever the market rate is when it comes time to refix), or let your loan roll onto a floating rate. Fixed rates usually provide the lowest interest rate options as lenders compete with fixed rate specials, giving you access to the lowest rates.

One downside to a fixed rate loan is that after the agreement is signed off on, rates may drop but you are locked into whatever interest rate you agreed upon. For this reason, many people choose to split their loan into multiple mortgages with different fixed terms. This way you can fix portions of your mortgage for 3 years, 2 years and 1 year for example so that you can refix them at different times.

Be aware that with a fixed rate loan, if you sell your property or break your fixed loan for another reason you may be charged a break fee.

Floating (or variable) loan

The key advantage of a floating (or variable) mortgage is the freedom to make extra or lump sum repayments without penalty whenever you choose. This way you can pay off the loan sooner so you end up paying less interest overall and clear the loan more quickly.

Of course, this is only a winning approach if you are in a position to make extra payments and are disciplined enough with your money to regularly use it to pay off more of your mortgage.

Floating rates are also popular with people who think that interest rates will soon be on the way down and don’t want to lock in a fixed rate when they think a better deal is coming.

This decision making is based on speculation so make sure you crunch your numbers if you’re going down this route to understand how much of a difference staying on a floating rate will make.

One con is that a floating rate mortgage has an interest rate that can increase or decrease at any time. Of course, if it goes down then that would be in your best interest, but this isn’t always the case. It is also important to note that floating interest rates are usually higher than fixed rates. As a result, it can take longer and cost thousands more in interest to eventually repay your home loan in full hence our recommendation to crunch the numbers!

Revolving mortgages

These work very much like a giant overdraft. Your mortgage becomes your everyday account, and you'll be given a credit limit. The way it works is that your account balance will go up and down as money is paid in and spent. You'll pay interest on the balance outstanding, which for most people will change daily as transactions occur.

What sets revolving credit mortgages apart from the other options is that they do not have set repayments on set dates. It is, instead, up to the borrower to make repayments when they want to do so. Until that happens though, interest keeps accumulating to the total outstanding balance. This loan option works best when the balance owed is kept as low as possible to save on interest costs and the cost of the mortgage overall.

Most people with revolving mortgages put all their money into the one account including savings and income to offset the amount of interest they pay as much as possible.

While this approach has been proven to help people pay off mortgages faster, it relies on a great deal of financial discipline and many people find that their mortgage balance remains the same as they are unable to reduce their spending or increase their savings enough to make a difference.

Can you have more than one type of mortgage?

Yes. Many people employ this method to achieve the best balance between the different types of mortgages. As we mentioned earlier for example, you may have multiple fixed rate mortgages at one time. You might also choose to split between a floating and a fixed mortgage to spread your risk. The floating mortgage allows flexibility for extra repayments while the fixed rate mortgage allows a better sense of budget.

Everyone’s own financial situation will be different and require a unique approach so we highly recommend consulting with a mortgage broker who can get you the best rates and help plan out the right mortgage structure for you.

Our own home loans expert Adam Thompson would be happy to chat with you if you’re keen to get some advice around your home loan structure. Give him a call on 021 855 854.