HOME LOANS

Homeowners split on the best mortgage options

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The use of fixed rate mortgages has increased five-fold since early 2010, according to the latest Australian Bureau of Statistics' housing finance data.

In April 2012, the ABS said 14 percent of homeowners were using fixed rate mortgages, compared with 2.6 percent in April 2010.

The parlous state of the economy might be one explanation for the flight to fixed rates. However, the general consensus is they provide homeowners with additional financial security.

Sally Bruce, mortgage general manager for NAB, told The Australian recently: "Fixed rate home loans give borrowers certainty around ongoing costs, which can help to manage the household budget." However, while fixed repayments can seem a sensible strategy when interest rates are heading north, it can prove costly, when they fall as they have in recent times.

As a consequence, the majority of homeowners prefer to take their chances with variable rate mortgages. Generally speaking, variable rate loans move in tandem with changes to official cash rate, determined by the Reserve Bank of Australia (RBA). However, this is not always the case! For example, ANZ is tending to move to the beat of its own drum – although it did pass on an RBA-led 0.25 percent rate cut in June.

As for the benefits attached to variable rate mortgages, Sheyne Walsh, head of lending for Centric Wealth, told Fairfax recently, that borrowers prefer: "the flexibility of accelerated repayments, lump-sum payments, offsets and redraws that comes with a variable rate loan."

Just be mindful, though, that these bells and whistles aren't always free, which should be factored in when choosing a variable rate home loan.

If you want it both ways, then a 'split mortgage' allows a homeowner to fix some of the interest repayments, while maintaining some of the benefits attached to a variable rate mortgage.

Lisa Montgomery, CEO of Resi home loans, says: "Regarding splitting your loan between fixed and variable – my opinion has always been to create a balance with your loan portfolio to take advantage of the best of both worlds." In other words, with split loans, if rates soar, the fixed component of the mortgage will be protected against the hike. On the flipside, when rates fall, the variable component enables home owners to enjoy lower loan repayments.

To help you choose the right mortgage, visit leading financial comparison website www.ratecity.com.au, which outlines the features and interest rates attached to hundreds of competitive variable, fixed and split mortgage options.