They are the age-old questions when applying for a home loan. Is a fixed or variable interest rate better? Should I go for principal and interest, or interest only?

When applying for a home loan, whether it’s your first or your tenth, you’ll inevitably run into questions about the interest rate. You’ll need to decide if you prefer a fixed or variable rate, if you want to pay principal and interest for a period or interest only, and how you want to structure your loan for the best results.

Interest rates are currently sitting at a record low around the country, and many property owners are looking to buy up, restructure or refinance their existing loans.

Of those property owners, many will be investors. Of those investors, 99.1% will fail to achieve the results they’re hoping for.

So the question is, how do you make the most of the current interest rates, and determine what’s best for you and ultimately build your own property empire?

How do you choose the right investment rate?

When you’re looking to embark on a home loan, choosing the right investment rate is important. While choosing the correct one could allow you to pay your loan off in record time, choosing the wrong one could cost you and push your repayments out even further. You don’t want to end up with the wrong rate.

As expected, there are advantages and disadvantages to both. A fixed rate will afford you the security of predictable repayments, allowing you to budget better and know what’s ahead. In comparison, a variable rate will allow you to potentially save money if the interest rate drops, and you can often have the flexibility to pay your mortgage off faster.

Depending on your circumstances you may alternatively elect to split the loan between both fixed and variable rates combined, paying off one portion of your loan faster at a higher interest rate, while maintaining the other portion at fixed repayments. In order to determine which rate is right for you, we recommend talking to our team.

Should I pay principal and interest, or interest-only?

According to a 2018 publication by the Royal Bank of Australia, owner-occupier loans with P&I (principal and interest) payments are the most common type of loan in Australia [1]. But are they the best type of loan?

Well, that really depends on your circumstances, and what your goals are.

While you will always have to pay off both the principal and interest amount in the end, you can revert to interest-only payments for a period of time. During this time, you will only make repayments based off of your interest rate, and at the end of the time period you will revert back to a P&I loan.

So how can an interest-only rate benefit you, and why would people choose it?

Well, for the period of time that you’re on an interest-only loan, your repayments will be lower. This means you’re paying less towards your loan, and it may allow you to save more money or re-allocate that extra money towards paying off a different debt. However, the disadvantage of this is that, once your interest-only period is over, you’ll end up with bigger repayments to make up for lost time, and it’s important to consider if you can afford these new, larger repayments.

Are there any other loan structures I should consider?

There are a wide variety of loan structures available in Australia, and which one is best for you will depend on your needs. 

The most common types of loans are those discussed above, and they’re suitable for many Australians who are looking to get into the property market for the first time. For those who may be self-employed, or looking to expand their investment portfolio, there are a range of other alternatives such as including split rate loans, low doc loans, self-employed loans and more.

The team at National Wealth Advisory has nearly 50 years of combined industry experience. Our wealth of financial knowledge has supported a range of Australians in achieving their financial goals, and we would love to speak with you to understand your circumstances too. For more information, give our team a call on 1300 268 954.