THE average Victorian mortgage is at a record $333,000 – $39,700 more than last year – and with interest rates tipped to rise it’s never been more important to get the right home loan.

Commonwealth Bank executive manager of home loan pricing and offer management Ray Ters said it was important to understand the different features offered by different loans and which worked best for individual borrowers.

‘A fixed loan gives customers the assurance of knowing their repayments for a set period of time, giving customer confidence to budget accurately,’ Mr Ters explained.

‘Variable home loans offer a variety of features and flexibility such as the ability to redraw extra repayments and make unlimited extra repayments and can be linked to an offset accounts.

‘A split loan gives customers the best of both worlds; offering a balance of certainty associated with a fixed loan, combined with room to move if they want to pay off their variable rate loan sooner.’

Interest-only loans were popular among investors, providing flexibility to reduce loan commitment during the interest-only period, Mr Ters said.

‘Alternatively, customers can pay principal and interest to pay off their home loan as soon as possible to own their property,’ he said.

While the Reserve Bank last week left the official cash rate at 2.5 per cent, a survey of banking experts by comparison website found most expected interest rates to rises next year.

‘The good times for property buyers are not expected to last much longer,’ spokeswoman Michelle Hutchison said.

‘The cash rate is expected to gradually increase over the next two to three years and hit a ‘new normal’ level of 4 per cent.

‘If you’re an existing homebuyer or hitting the property market this mortgage season, make sure you prepare a buffer for when interest rates rise.’

First-home buyers Tim Wilson and Melanie Cooper are making extra payments on the loan they took to buy their Bentleigh East home last month.

They plan to pay off their mortgage more quickly while they living in the home, then use it as an investment once a chunk of the principal has been paid.

The couple weighed up various loan options before deciding on a principal and interest, variable rate home loan.

‘What we initially thought was to split the loan in half – so half fixed and half variable. But looking at the fine print, it only allowed us to pay off $8000 a year,’ Mr Wilson said.

‘Because it’s our first loan we wanted to see what the market was doing. Down the track, once we’ve got more of a handle on it, we’ll think about fixing it,’ he said.

Mortgage Choice spokeswoman Jessica Darnbrough said there was little difference in the interest rates offered by the major banks for their three-year and five-year fixed-rate loans.

‘The three-year fixed rates are, on average approximately five basis points lower than the five-year fixed rate,’ she said.

‘As such, the difference in monthly mortgage repayments between three-year fixed rates and five-year fixed rate products is tiny.’

She said fixing for a shorter period of time of one to three years gave borrowers certainty about their repayments without locking them into a lengthy commitment at that repayment level. If their circumstances changed within the fixed term, such as having a child, they did not have as long to wait to change their loan structure and might not have to pay as much to break the fixed term.

Investors with multiple properties could bundle loans together with the one lender to lower bank fees, or negotiate better interest rates, Ms Darnbrough said.

‘It is important to note that if a borrower does choose to bundle all of their assets together and cross-securitise their loans, they will have to attach every loan to every asset. The problem with this is that if something goes wrong and they are forced to sell a property, the bank has recourse to all of their assets, not just the troubled one,’ she warned.

Ms Darnbrough also recommended an annual home loan health check to ensure a mortgage continued to meet a borrower’s needs.

Posted by Melissa Buttigieg – Herald Sun on 12th October, 2014