Property loans: fixed, variable or honeymoon rates?

If you a buying property, either as a principal residence or investment then one of the biggest decisions you’ll have to make is whether to fix your loan. Before you sign take a longer look at the two options. Money Buddy helps you consider the facts.

Mortgages: fixed vs variable loans

It’s pretty straight forward: a fixed interest rate loan means your rate of interest will not change during the term you have elected to fix your rate for. An advantage of this is that during the fixed period the borrower knows exactly what the repayments will be and can plan around these unchanging figures.
Fixed rates come into their own when variable rates rise. People with fixed loans are protected from these fluctuations and may end up saving a bit on their interest. However, if variable rates drop then people who have fixed their loans lose as they may be paying higher interest.
A variable home loan interest rate moves up and down with market interest rates. The main determinant of variable home loan interest rates is the cash rate set by the Reserve Bank of Australia. When the Reserve Bank alters the official cash rate, most variable home loan interest rates change by a similar, if not identical, amount.
Home loans with variable interest rates usually have the highest repayment flexibility. For example, people can make additional payments and reduce their interest bill over the life of the loan, pay more frequently – weekly or fortnightly – and the norm is that the borrower can pay out their loan early without penalty.

Mortgage calculators

Repayment calculation tools such as the mortgage calculators offered by many banks online allow borrowers to create models based on different repayment values and fixed versus variable interest rate loans. These loan repayment tools also allow the user to change details such as the repayment period and frequency.

Beware of honeymoon interest rates

Honeymoon interest rates have a certain appeal but before you sign up for what appears to be a cheap home loan deal check the comparison interest rate. A six-month discount is only a good deal if the average interest rate over the life of the loan is also lower than the going rate. Many loans that offer honeymoon rates actually have a higher comparison rate – which means they are not such good value once the “honeymoon” is over. The comparison rate takes into account the actual cost of the money you borrow including deferred establishment fees, application fees, valuation fees, lender's legal costs, monthly or annual account keeping fees.

Low-doc and no-doc loans

It is worth noting that property investing was claimed to be one of the main contributions to wealth in the recent BRW Rich List. The idea behind building a property investment portfolio is to borrow the deposit and interest payments on the home loan and to use low- or no-doc loans to finance 80 percent or more of the cost.
New lenders, and now some of the major banks, will also take into account rental income from investment properties, taxation and depreciation benefit which assists investors in building a large property portfolio. 

Growing your property portfolio

If you do want to build an investment property portfolio then before you take out a loan for your first property have this in mind – it may affect the mortgage product you choose to go with. Also consider using a different lender for each new investment property you purchase. Some lenders put additional restrictions upon your loan as your portfolio grows. A mortgage broker may be able to assist you with informed recommendations about different loan products to suit your needs.