Our daughter has just purchased a home. She has a secure job and is earning a good wage. Could you give us advice on the percentage of repayments for fixed and variable home loans?

Paul thanks for your question. I should begin with the fact that we are living in unusual times and strategies that we are putting in place today are very different to pre-this virus emerging.

Your aim should always be to pay off your home loan as soon as possible. The main reason for this is that it costs more than people think. You are paying your home loan off with after tax dollars which means you need to earn an income, pay tax, then with what’s left you pay your home loan.

The landscape for interest rates over the next three to four years is to remain low. The pressure on the reserve bank to keep rates low due to high unemployment and a poor economy will be great. We see that inflation is very much under control and this is one of the biggest influences on interest rates going up.

Regarding your question I would definitely fix a portion of the loan. The best way to determine this is to work out how much you feel you can pay off your loan over the next four years and put that amount of loan in a variable loan and the balance you should fix for this period being four years. For example, if your total loan was $400,000 and you calculated that you could pay of $100,000 by increasing your repayments then I would fix $300,000 and leave $100,000 in your variable loan.

The main benefit of doing this is you can focus on your variable loan and target paying this off which not only provides you a sense of satisfaction but also puts you ahead on your repayments. This is a great benefit if you are unable to pay your loan for a short period as you can access your funds in your loan that you are in advance to bridge the gap.

This is also a great way to save as you can re draw these funds if you need emergency funds at any time.

When looking at your cash flow you should work out what you can afford to pay each month and once you have taken off the interest only portion off this amount the balance should be paid off your variable loan. We use this type of strategy on a regular basis to reduce peoples home loans faster. Because people are focused on a smaller loan amount, they are more motivated and stick to their cash flow targets.

I hope this has been of value to you and please let us know if we can help you in the future.