There are many things to consider when pursuing a property to buy. One of the first items to determine is the purpose of your purchase. For example, will you be buying the property with the hopes of it returning dividends as an investment, or do you plan on dwelling within the property itself. In a study done by CoreLogic, approximately 2.6 million dwellings were owned by investors. For perspective, this is about one third of the entire Australian housing stock and almost one fourth of the value of the housing stock. Defining yourself as an investor or a dweller is important in making decisions about loans as well. The Australian Tax Office treats investors and owner occupiers differently when it comes to repayment and possible interest rates. With that said, you may come at a crossroads when choosing your loan type and it is important to keep your property’s purpose in mind when choosing fixed or variable rate loans.
There are many types of interest rates and repayment programs and it is crucial to understand which plan would best fit your goals. The first interest rate type to consider is a fixed rate. In a fixed interest rate loan, you will be locked into a rate for typically one to five years. This can protect you from rising interest rates due to the economy and market. For example, if you plan on occupying the property you buy for a long time, fluctuations in the market may affect you less and you will not have to adjust your repayments to fit the new rate. Some fixed rate loans may turn into a variable rate loan. This kind of loan is known as a partially fixed loan. For many, this provides security in knowing that a portion of their loan will be repaid in a standard fee, but provides flexibility to those that want to take advantage of the market if interest values were to suddenly drop. While the security and stability to budget for a fixed rate loan may be appealing, it is important to note that many fixed rates are higher than variable rates from the start. Fixed rate loans are also harder to break from if you try to refinance such that there may be a break fee.
With these considerations, you may find yourself looking into other options such as a variable rate loan. A variable rate loan may be a better option for those that want an investment property and may intend to sell within a few years, This loan type is often preferred for this situation because the rates are lower at the start than a fixed rate. It also takes into account the nature of the market and if you sell before interest rates rise, you may end up spending less money on interest payments overall. There are also often more features with variable rate loan such as unlimited repayments and lower cost to refinance. This is often a great option for investors, but keep in mind the fine print within the loan. Items to consider are how frequently your rate can adjust, your margin, cap rate, and ceiling rate. Also, as the market can be in your favor, it can also raise your interest rates at unexpected times. These are the risks that you will take for the possibility for paying less money overall.
Trying to figure out the ins and outs of your loan and your best options may be overwhelming, but reading through a quick guide to variable rate loans and guides to fixed loans will help you make the most educated and financially sound decision.