If you’re purchasing a new property or refinancing your current home loan, you may be questioning whether to choose a fixed or variable interest rate. Unfortunately, there is no easy answer. No one can predict the future of interest rate changes but here are a few tips that may assist in your decision-making process.
Fixed interest rates
If you choose a fixed home loan rate, your payment for each month is locked in according to the interest rate when signing your contract. This generally remains the same for one to five years and provides borrowers with certainty in their repayments. This option is beneficial for investors who need to budget their outgoings.
However, If interest rates drop, those locked into a fixed interest rate will not benefit. Generally, there is less flexibility with a fixed interest rate, with some banks limiting additional repayments. A monthly fee usually applies as well as hefty fees for early repayment.
Variable interest rates
On the other hand, with a variable interest rate loan, your interest rate changes according to market conditions, meaning it could rise or fall. Extra repayments are readily accepted thereby saving interest payments and reducing the term of the loan, without monthly fees. Variable-rate home loans are more likely to have flexible conditions including offset accounts, direct salary payments and periodical payments.
Despite this, those with a variable interest loan are at the mercy of the banks who can raise their rates at any time. Historically, any increase (or decrease) would be in line with the RBA’s cash rate but in recent times the banks have increased their rates by even more.
Combination loans
Another option is to combine these two methods and have a part fixed, part variable interest loan. This allows you to manage some of the risks of interest rate rises while still making extra payments. This option gives a blend of repayment flexibility and interest rate security and the split can be determined in a way to best suit your needs.
APS Home Loans & Mortgage Broking
Still unsure about which option will suit your needs and goals? We offer a free Mortgage Broking Service to help you find the right home loan. We’ll look at your circumstances to determine whether a fixed, variable or combination home loan is the right fit. The best part is that it’s a free service! Learn more here.