Are you thinking about purchasing your first home or an additional investment property? Maybe you want to refinance an existing home loan. In any case, you may be considering whether you should fix your home loan. With interest rates hitting record lows, the prospect of fixing their interest rates is appealing to many people paying off mortgages.
However, there is a multitude of factors to consider and it is very difficult to predict what might happen to interest rates and the economy in the future. You should gain as much information as possible on the benefits and risks of both fixed and variable home loans to ensure your choice suits your personal circumstances.
Fixed Home Loans
Fixed home loans have an interest rate that is fixed for a set period of time, generally one, three or five years. Once the fixed rate term is over, the loan will switch to the variable rate offered by the lender.
When lenders fix their rates, they try to predict how the official interest rate might move. If the rate is expected to rise, they may fix a rate higher than their variable rate and vice versa. This is not a given, however, with more lenders than ever before acting independently of the RBA.
Benefits of a fixed rate loan are:
- Budgeting – Fixed home loans are easier to budget for as you know exactly how much each repayment will cost.
- Security – You’re not vulnerable to sudden rate changes, ensuring you can afford the loan and meet repayments.
Disadvantages include:
- Rate drops – If the interest rate falls below your fixed rates, it will be frustrating to have to pay more and miss out on the rate drop.
- Break fees – Fixed rate loans can have a break fee if you change the terms of your loan or sell the property.
Variable Home Loans
Variable home loans have rates that fluctuate similarly to RBA interest rates, shifting based on funding cost for the lender and the current economic climate. Having a variable home loan is great when interest rates are expected to fall.
While interest rates are unlikely to fall again, a variable home loan offers a variety of other benefits, including:
- Flexibility – These home loans tend to come with more features such as a redraw facility and the ability to break or refinance the loan without significant additional costs.
- Extra repayments – Unlike most fixed rate home loans, you can make extra repayments at no additional cost.
Disadvantages include:
- Rate hikes – It can be stressful and financially damaging if the interest rate rises suddenly and significantly.
- Uncertainty – You can be less sure when it comes to planning and budgeting for your monthly home loan repayments.
How to Choose the Right Home Loan
When deciding how you should structure your home loan, you should consider what the current interest rate is and what loan features you want to be able to use. Another choice is to split the loan, meaning you fix part of the loan and keep the rest on a variable rate. This allows you to manage some of the risks of a variable loan while still accessing flexible loan options.
Our friendly team of mortgage brokers at Kaboodle Finance can help you determine the right home loan structure for your situation. Get in touch today for practical advice and assistance with home loans.
