Tailoring your home loan structure

With the right structure, you could pay less interest and even shave years off your home loan. But what is the ‘right’ structure for you? As well as interest rates, it’s a good idea to consider your current financial situation and your goals before you decide. Here are some of your options:

With a fixed loan, your interest rate will stay the same throughout the fixed-rate period. Fix your interest rate for two years, for example, and you’ll know what your repayments will be for that period. It’s often chosen by people who have a consistent income, are planning to stay in their home for a while and like to plan their budgets long-term.

Benefits:

• Allows you to lock in an interest rate for a period and avoid any interest rate changes in that time.
• Flexibility to make extra repayments up to 5% of your loan balance, when the fixed rate period started, without any early repayment recovery charges.
• Usually offers lower interest rates than a floating home loan.

Things to know:

• If interest rates drop, you’re locked into a higher rate - unless you exit the fixed term early and pay any early repayment fees.
• If things change and you want to repay your loan before the end of the fixed rate period or make a lump sum payment of more than 5%, early repayment fees may apply.

With a floating loan, your interest rate can go up and down along with the market.

Benefits:

• If the floating interest rate drops, you’ll get the benefit immediately.
• Flexibility to make extra repayments, or fully repay the loan, at any time without having to pay fees.

Things to know:

• If the floating interest rate rises, your repayments will go up.

A revolving credit loan is like a big overdraft, using your home’s equity as a line of credit at a floating interest rate. It’s attached to your everyday account, meaning you only pay interest on the amount you’ve borrowed, and if you need extra funds, you can take out what you need.

Benefits:

• You can make additional payments at any time without paying fees – great if you’re expecting to receive some extra money, like a bonus or an inheritance.
• Any surplus money you have in there can minimise the amount of interest you pay. When your salary is paid into your revolving credit, for example, it immediately reduces your loan – and the amount you’re paying interest on, which means you could pay off your home loan faster.
• You can access extra money when you need – redraw up to the credit limit at any time.

Things to know:

• With the flexibility of this type of loan, the amount you owe can fluctuate, so it’s a good idea to keep a close eye on the balance.
• If the floating interest rate rises, your interest costs will go up too.

You could also split your loan across multiple fixed-term loans or a combination of loan types. For example, you could split a $300k loan by having $150k fixed for one year, $100k fixed for two years and $50k in a revolving credit loan.

Many people find it gives them both certainty and flexibility – it can protect against the pain of interest rate fluctuations while keeping repayments flexible.

Splitting your lending across different fixed terms means when one ends, any changes to interest rates and repayments will only affect that part of your lending this is especially helpful if you’re shifting to a higher interest rate.

If you’re planning a small renovation or house repairs, a revolving credit loan could be a good option, too – you can borrow and repay money as you need.

It’s all about what’s happening in the market, your plans and the way you use your money. By tailoring your home loan to your needs, you could lower your interest payments, pay off your loan faster or get access to credit when you need it. But it’s important to carefully consider your options and consider seeking financial advice before making long-term decisions. It can be good to get a balance of certainty, flexibility and control to manage your finances confidently.