Getting a mortgage can be overwhelming, particularly when there are so many different options for fees, formats and interest rates, that are all constantly changing as the market peaks and troughs.
All these different factors affect your loan costs and how quickly you'll be able to repay the mortgage, so it’s important to know your options and make a well-informed decision.
The typical options for mortgage financing are fixed-rate, flexible, and floating rate mortgages - each suited to a unique type of homeowner. With so much information out there it can be hard to know the differences, so we’ve broken down the pros and cons of a flexible mortgage for you.
You can check our other blogs in this series for more information on your options, here:
What is a Flexible Mortgage?
A flexible mortgage refers to a home loan that is confined to the parameters of a floating of fixed rate mortgage, and offers some flexibility in the way repayments are made and structured.
Typically, there are three ways types of mortgages that would be considered 'flexible'.
1. Revolving Credit Mortgage
A revolving credit mortgage acts as one giant overdraft, combining all of your accounts (check, credit, savings and home loan) into one. This means that when you are paid or funds are transferred into your account, they immediately are put towards your home loan balance, reducing the total interest calculated at any given time.
With this structure, you're able to withdraw funds at any time (up to your credit limit), allowing a healthy cashflow with the option to pay down your loan quickly.
- If you're a freelancer or sole-trader and your income tends to fluctuate month on month, fixed repayments each month might not suit your budget and a revolving credit mortgage will give you the option to pay as little or as much as your income allows. You're only charged interest on your outstanding balance each month, so there's opportunity to really reduce interest over time if you earn more.
- Often in traditional mortgage structures, you're penalised for overpaying or changing the amount you pay each month with a fee. Revolving credit mortgages allow the flexibility to avoid these fees.
- If you find it difficult to keep track of all of your funds in various accounts, this is a great way to consolidate everything into one, easy to manage account.
- There's an option to choose between a fixed or reducing credit limit, meaning you can pay down your loan as you go by reducing your credit limit in increments.
- A revolving credit mortgage requires a significant amount of budgeting discipline to upkeep, as you have the ability to withdraw funds up to your credit limit at any time. If you're not very good at budgeting and can't help but overspend, it's likely that you'll actually increase the amount of interest accrued, rather than reduce it.
- Usually, a revolving credit mortgage goes hand in hand with a floating or variable interest rate. This means that your interest rate could change in line with market conditions throughout the tenure of your loan - for better or for worse.
2. Offset Mortgage
An offset mortgage is a clever structure that takes your bank accounts and links them to your home loan balance. Your home loan balance is then offset against the money across your accounts, and as interest is calculated daily, saves the total amount of interest you pay over time.
Total loan balance - total savings balance = the difference you pay interest on.
Sometimes mortgage brokers recommend setting up a credit card separately to use for every day funds, leaving your money in your accounts to be offset against your home loan for the maximum possible days - reducing your interest paid even further.
- An offset mortgage is a brilliant way to reduce your total interest paid over time, and decrease the overall tenure of your loan. If you're looking to pay a mortgage off quickly and potentially save thousands of dollars in interest over time, this could be the best option for you.
- In a traditional mortgage, the amount you pay and the tenure of the loan is often fixed. An offset loan allows you to reduce the tenure of the loan without penalty.
- An offset loan also allows the home owner to focus on saving as well as paying down their home loan, acting as an incentive to squirrel away money into a savings account to reduce interest on your loan.
- Unlike a revolving credit mortgage, you'll still be able to keep your home loan and everyday/savings accounts completely separate and make consistent monthly repayments if you prefer more structure.
- Offset mortgages are typically restricted to floating interest rates, meaning that if market conditions change for the worse, you're liable to pay a higher interest rate than a mortgage that was fixed at a lower interest rate for a set term.
- The savings accounts that are linked to your home loan balance often don't earn any interest like a regular savings account would, so it's important to take this into account. In saying that, usually interest on debt is a lot higher than interest gained on savings - so it's likely to still be worth it.
- Offset mortgages can be harder to acquire for first home buyers with a lower deposit. A fair number of providers request a loan to value (LTV) ratio of at least 75% before considering you for an offset mortgage. This means a deposit of 25% or more could be required.
3. A Combination of Fixed and Floating Rate Mortgages
The third type of flexible mortgage is a strategic mix of fixed and floating interest rates, sometimes referred to as a 'split home loan'. This means taking a percentage of your total home loan and applying an agreed-upon fixed interest rate to it, and leaving the remaining portion of your mortgage subject to floating interest rates.
Often, people choose this type of loan if they're looking to find a happy balance between fixed or floating loans and mitigate the risk of picking just one.
- This type of mortgage structure allows you to take advantage of the flexibility of a floating rate mortgage, while cashing in on the certainty of a low, fixed rate mortgage. The percentage of home loan much you devote to each type of interest rate can be tailored to your priorities.
- Reduce the risk you take by not putting all of your eggs in one basket when it comes to selecting either a fixed-rate or floating-rate loan.
- You're not locked into the very structured monthly payment method of a fixed-rate loan, as you can pay with flexibility on the floating rate portion of your loan, making your funds more accessible should you need them.
Which mortgage option is the best?
Making the right choice in a mortgage can save or cost you thousands. While it’s an important and sometimes overwhelming decision, don’t let your mortgage stress you out. Get in contact with us, and we can help you find out what you can borrow, and help you along your entire mortgage process.