Choosing the right home loan can feel like drawing straws. There as so many Australian lenders and once you choose one, you then have to decide on the different home loan types they are offering. That is why it’s essential that you carry out your own home loan comparisons so that you know what’s going to work best for you.
In Australia, standard variable home loan interest rates are partly influenced by the Reserve Bank of Australia (RBA). Lenders take into account the RBA’s official cash rate, but other factors help to influence rates too. Indeed, lenders may even push up interest rates if the Reserve Bank leaves official rates on hold.
This is a risk that borrowers face if they choose standard variable home loan interest rates. If you have a variable rate home loan, you need to be prepared for the possibility that standard variable mortgage interest rates could rise during the term of your home loan.
One of the major benefits of a variable rate home loan is the flexibility it allows you to have over a fixed rate home loan, especially if you plan to pay off your home loan quickly (or with lump sum payments). Many variable mortgages have features such as ‘mortgage offset accounts’ that can help you own a home faster.
Mortgage offset accounts
A mortgage offset account is like a transaction account linked to your variable rate mortgage. The money in your transaction account is offset against the balance of your home loan, so you only have to pay interest on the balance.
For example, if you have an outstanding balance on your mortgage of $400,000 and your offset account has $50,000 in it, you will only pay interest on $350,000 ($400,000 minus $50,000). There may also be tax benefits attached to mortgage offset accounts that you should discuss with your accountant.
Statistically over the last twenty years, variable rates have been lower than fixed rates in Australia. However, over a longer period, Australia has experienced extreme inflation and recession. When this happens, using a 1 year fixed, 3 year fixed rate or longer, can be a good option as interest rates will start to rise.