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Creating the right set up for your “Home loan” 

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Choosing the right product from dozens of different products offered by the  lenders can be a daunting task especially when you are not aware of what  exactly it might bring on your table. To make your selection process easier, I  have come up with a special “Sweet package” that will help you understand the  products better. You can apply this sweet package to your home loan and see  the variety of sweetness that it can bring to your financial wellbeing.  

“Fixed rate vs Standard variable rate”  

Fixed rate by its name, is loan on a fixed term which means your interest rates  are locked and you are charged with the same interest rate throughout the fixed  loan term. It is just like paying your monthly subscription on Netflix, it is the  same every month unless you change or upgrade your subscription. Now, it has  both pros and cons depending on your financial situation.  

You do not have to worry about the fluctuation in interest rates. You are  in the safer zone. You have locked that jewellery!  

It makes your budgeting easier as you can predict your mortgage  expenses because of the fixed interest rates every month.  

Now that you have locked your interest rate, you would not be able to  enjoy the perks of decreased interest rates as you have paid a lock fee to  the lender. You have given your commitment!  

Variable rate by its name, keeps changing. You do not have a fixed interest rate.  Some months you might enjoy the perks of lowest interest rates whereas some  months you might get caught with the highest. Having said that, it brings a lot of  positive factors with it. You might have noticed that I have mentioned “standard  variable rate”. Yes, you read it right. There are two types of variable rates- basic  and standard. Here I will be focusing on the standard variable rate as that makes  up my sweet package and later in the article you will see the significant role of  it. Let us see what this standard variable rate has to offer.  

Redraw and offset facility available. Damn these are some complicated  words but hang on there, I will explain in a while how beautiful these  terms are! 

Make the most out the decreased interest rates. As you have not made  any commitment to the lender, you are not obliged to stay on the fixed  rate.  

You might be a potential victim of the higher interest rates due to  instability in the market rates, but with my “sweet package” strategy, you  can easily mitigate that.  

Redraw facility allows you to make extra repayments up to a certain limit  towards your loan with no extra cost. Let us say that you have been making $100  extra repayment every month towards your loan, at the end of the year, this  $1200 will be made available to you to withdraw at a later date. Basically, it is  like saving on your home loan. You either use it in future or pay off your loan  quicker.  

On the other hand, offset facility is an eligible transaction account linked to your  eligible loan account. With this, instead of being charged on your full loan  balance you will just be charged on your loan amount minus your balance on the  offset account. For example, if you have $150,000 on you loan account and  $50,000 on your linked offset account, you will only be charged interest for  $100,000.  

Now that we know what fixed and variable rate are, what redraw and offset  facility are, let us move on to setting up the right package for you. Here is an  example.  

Jack and Jill have decided to purchase their first home worth $500,000. They  have managed to pay a deposit of $60,000 towards their purchase and they are  looking for a loan of $440,000. They are confused weather to go for fixed or  variable rate. Jack thinks that having fixed rate would be a better idea as they  both work for a company and have a fixed income coming in every month. That  way it would be easier for them to have a certainty of repayments and that they  can plan their budget. Whereas Jill thinks that they should have a variable rate  so that they can take the benefit of the decreased interest rates and can have  offset and redraw facility available as they are good savers.  

Here comes my sweet package and what I set up for them…… 

I knew that both were right in their place but what if they could take the  advantage of fixed and variable both? Sounds amazing, doesn’t it?  

I create a package for them. Out of the $440,000 loan amount, I put $350,000  into the fixed rate and $90,000 in the variable rate. Most of the lenders allow  loan splitting under their package options. What benefit they could have with  this split setup?  

They will have a certainty of repayment for the major portion of the loan  which is $350k that will make their every month budgeting easier as Jack  wanted.  

Since Jack and Jill will have fixed income coming into their account every  month, they can link that salary account to their variable loan portion and  save on interest on whatever they manage to accumulate on their salary  account as savings.  

If they will make some extra repayments on certain months, it will be  there for them as redraw amount which they can call “raincheck”. 

Aarjoo Thapa

Mortgage Finance Strategist

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