The way your loan is structured can potentially have a big impact for your return on a property investment. We therefore strongly recommend you put some time into getting your loan structure right. With that in mind, we thought we’d take a look at some of the different structures out there – so you can assess which is best suited to you.
Principal and Interest vs Interest Only
We actually talked about this concept at some length in a previous post – so we won’t go in depth here, but please feel free to check out all the info here.
Variable vs Fixed
Now let’s look at variable vs fixed loan structures – and what the potential differences and benefits are of each.
Variable Loan Structure
The variable structure is the most common way that people structure their loans. A variable interest rate is (yes, you’ve guessed right) variable – meaning it can change over time.
So if interest rates change in the market – so will your interest rates. That’s good news if interest rates go down … the amount of money you will have to pay will decrease. But, of course, if they go up, then – conversely – the amount you’ll have to pay will increase.
Variable rates obviously come into their own if the market goes down. You can potentially pay off more money on your mortgage than if you have a fixed loan.
Fixed Loan Structure
A fixed loan literally has a “fixed” interest rate that will apply for anywhere between one to five years. Five years is generally the limit to which fixed loans are applied – although you’ll find a few out there lasting for a longer term. With a fixed loan your interest rates stay the same – ensuring you know exactly what you’re going to be paying each month. So, you’ll have no surprises (good or bad).
However, fixed loans come with limitations. You generally can’t put extra money to pay off your loan because of the set amounts. It’s therefore much harder to pay these loans off quickly. On the flipside, you won’t bear the brunt of any changes if interest rates in the market go up. In fact, you’ll have a lower interest rate than everyone else.
Do your research
So it’s important to weigh up your options when choosing your loan structure.
It’s also worth noting you have some flexibility of choice: many investors, for example, will start with an interest only structure – then make a shift to principal and interest when their cash flow improves. Other investors will choose to split the loan – fixing only a part of it.
For more information, please don’t hesitate to contact us at OzBroker for a consultation – and find out which loan structure best suits your needs and requirements!