Loan structure key amid rate rises

Borrowers weighing up fixed versus variable home loans are being urged to focus less on chasing the lowest rate and more on finding a structure that suits their personal circumstances.

Shore Finance Co director Shane Martin said the question had become increasingly common since the Reserve Bank of Australia lifted the cash rate in May, with the official rate rising to 4.35 per cent.

Mr Martin said rate uncertainty had prompted many clients to ask whether they should lock in their loan, stay variable, or consider a mix of both.

“I’m having a lot of conversations at the moment around fixed versus variable.

“It always pops up when you have a cash rate increase, which we had in May.”

Mr Martin said economists remained divided on where rates could head next, with some forecasting further rises and others expecting the Reserve Bank to hold.

He said the most important question for borrowers was whether they could comfortably manage another one or two rate increases over the next six to 12 months.

“I think the number one deciding factor should be, can you sleep at night if you get another one to two rate increases over the next six to 12 months?

“And if you can’t, then we look at maybe structuring some of your loan on a fixed rate.”

Mr Martin said fixing part of a loan could provide repayment certainty, while leaving another portion variable could help preserve flexibility.

“That gets the certainty around what those repayments are going to be.

“But we leave some of the variable so that we maintain the good things about the variable, think your offset, think your unlimited repayments.”

He said a split loan could be a practical option for borrowers who wanted protection against further rate movements without giving up the benefits often attached to variable loans.

Mr Martin said borrowers should be wary of making decisions based solely on headline interest rates.

“I would say structure is the number one important thing here and rate comes second.

“What we want to do is make sure that your loan is structured correctly for you, and that the rate complements that in the back end.”