Getting the structure right

Yichern is a first home buyer working to a budget.

Yichern has a home loan of $340,000 for his first home. He has to manage his budget carefully and wants to know exactly what his repayments will be. He will have flatmates living with him to help pay the home loan repayments.

He’s decided to fix his loan across two fixed rate periods. That way, if interest rates change in the future, he hasn’t got all his eggs in one basket. He’s put $170,000 on a 1-year fixed rate and $170,000 on a 2-year fixed rate. 

He knows that if his circumstances improve during this time, he can make some additional repayments to his loan without being charged an Early Repayment Recovery, provided he's making his first extra repayment in that year and one of the following applies:

• He makes regular extra repayments towards his loan and these change his regular payments by less than or equal to $250 per week
• The extra lump sum repayment he's making is no more than 5% of the loan amount he owes on his loan.

The year runs from the date his fixed-rate period started or the anniversary of the date his fixed-rate period started.

Jill and Ravi have variable income and want to be able to make lump sum payments to their loan.

Jill and Ravi have a home loan of $400,000. Ravi is expecting to get quarterly bonuses across the year – they want the ability to use his bonuses to make lump sum payments on their home loan.

Given the variability of Ravi’s income, they’re wary of over-committing themselves. But they still want some flexibility to make additional repayments.

They decide to structure a $350,000 home loan split across two fixed rate periods and $50,000 as a floating home loan so they can make extra lump sum repayments when they have funds available, without being charged Early Repayment Recovery.

Lisa and Sarah are great at sticking to budget and want to pay off their home loan as fast as possible.

Lisa and Sarah purchased their first home a year ago, with a home loan of $530,000. They’re good at managing their money. For example, they didn’t dip into their savings when they were saving their deposit, and they always pay their credit card off in full without incurring interest costs. 

They chose to split $500,000 across two fixed rate periods and set up the remaining $30,000 as a Flexible Home Loan which they planned to pay down within a year. 

They kept the outstanding balance on their Flexible Home Loan as low as possible to minimise their interest costs. They achieved this by paying their salaries into their Flexible Home Loan account and managing their budget carefully. They made their everyday purchases using their credit card which has up to 55 days interest free. They never used their credit card for cash withdrawals and set up a Direct Debit to pay their card balance off in full each month (so they were never charged interest on their credit card). Note: credit card interest rates are higher than home loan interest rates. So this only works if they avoid being charged interest on their card by not making any cash withdrawals on their credit card and paying the balance off in full when it's due.

They’ve just achieved their goal of paying down their Flexible Home Loan, so they have $30,000 available to redraw. This is great timing because their first fixed home loan is now due for review – they’re going to make a lump sum payment of the $30,000 onto it before re-fixing. Then they’ll start the pay down cycle again!