ARE VARIABLE LOANS A VIABLE OPTION?
Published on April 23, 2015
Investing in property can be very rewarding when you start to see sound results, but the many decisions that need to be made in order to get to that point can be overwhelming for some.
It can sometimes be difficult to decipher which finance option is suited to your situation.
Fortunately, MRD are happy to assist when it comes to helping you understand how each type of loan operates so you can make more informed decisions.
This week we’re going to put a spotlight on variable rate loans.
How variable loans work
Variable rate loans are the most popular type of home loan in Australia because they often provide additional flexibility compared to other types of loans.
According to Australian Bureau of Statistics data the proportion of fixed rate mortgages reached its peak at 25.5 per cent during the global financial crisis (GFC) as homebuyers feared rates would keep rising and locked in as much certainty as they could.
It dropped back to 14.9 per cent of home loans just under 12 months ago and sits around that same level today, so as you can see variable rate loans remain by far the most preferred type of loan.
So why are variable rate loans so popular?
One reason homebuyers might prefer variable rates is because mortgage rates are mostly only fixed for up to five years, a fairly short time frame.
More likely, however, is the knowledge that when it comes to fixing rates the banks are usually the winners as the variable rate drops below what it was at the time a loan was fixed.
Another is the lack of flexibility with fixed loans. Aside from missing out on future rate cuts there are huge payout fees to be borne if the loan is paid out early (e.g. if the property was sold).
Some credit providers also offer low interest rates for the first one or two years of a loan, sometimes called 'honeymoon' rates, which provide even cheaper variable rates.
These loans are often ones to be avoided because of the ‘sting in the tail’ after the honeymoon period expires. That said, they are marketed effectively and many people sign up for them thinking they are getting more than they are.
Variable interest rates fluctuate in line with interest rate movements set by the Reserve Bank of Australia (RBA). Changes to the cost of funding to financial institutions on the money they source to lend out also feeds into the interest rates they charge.
But banks don't always pass on the RBA’s cuts, as we saw in the post GFC era. At the time our banks argued that their wholesale borrowing costs were rising more than the increases to the official cash rate as set by the RBA.
Basic and standard variable loans
Variable loans are generally broken into two categories by financial institutions: basic and standard.
As the name suggests, the basic variable rate only covers the basic home loan features.
On these loans you won’t have access to features such as a redraw facility, however, this also means the interest rate is generally slightly lower than other loans.
The standard variable rate is traditionally slightly higher than the basic variable, however, along with this you may receive extra features such as a redraw facility, repayment frequency flexibility, portability and the option to pay in advance.
Variable loans generally require closer monitoring, especially if you stretch your budget and interest rates rise, as you’ll still be required to service the loan on a regular basis.
It is important to make sure that you budget and plan for the future should interest rates rise to ensure that you are able to meet the required repayments.
How to choose
To fix or go variable is probably the biggest decision you’ll have to make when considering a loan.
While we can’t tell you which is best for you, we'll continue to dedicate our attention to highlighting some of the different loans available to help guide you when it comes time to sign on the dotted line.
In the meantime we’re able to compare what’s currently on offer from many lenders and find the best loan for your specific needs (fixed or variable) - just give us a call for an obligation free appraisal.
MRD offer a full spectrum of services relating to property acquisition, investment options, superannuation and insurance, and can help you develop clarity around your short, medium and long term financial goals.
Speaking to MRD Finance is a good starting point to find out which loan is most appropriate for your individual circumstances, and if we can help we'll also guide you through the paperwork and application requirements.
Pick up the phone and call us on 1300 883 854 or send an email to firstname.lastname@example.org with your name and best contact phone number and we'll provide you with more information, including a complimentary consultation to establish what loan structure best suits your needs.
Partnering with you for your investment success,