A common question I get when working with my clients is “should I go with a fixed rate home loan”?
Before we answer that question lets first have a quick look at the differences between a variable rate home loan and a fixed rate home loan.
VARIABLE RATE LOANS
This is the most common loan offered by lenders and is used by many people to buy their homes. These loans have repayment periods usually of either 25 or 30 years.
Often lending institutions will offer a Honeymoon period with lower (discounted) interest rates to motivate you to choose their loan over the competition. The benefits of this discount (or honeymoon period) are short-lived as the remaining years on your loan are charged at a higher standard variable rate.
ADVANTAGES
- Discipline of making regular repayments
- Ability to make extra repayments without penalty
- Offset accounts and redraw are a common feature
- Discounts available for most variable loans
- If the RBA cuts rates then the variable rate will follow (but not all ways)
DISADVANTAGES
- Interest rate fluctuations.
- When the RBA raises rates the lenders are usually quick to pass it along.
- Not all variable loans are the same
- May have a large jump in interest rate after the honeymoon period ends.
FIXED RATE LOANS
This loan has a set interest rate for a set period of time. This means you know exactly what your repayments will be for the term of the fixed rate loan and in a market with rising interest rates this could save you thousands of dollars over the loan term.
ADVANTAGES
- Fixing the interest rate for a period of time insures against future interest rate rises.
- It is easy to budget for the same regular repayment each month.
DISADVANTAGES
- Do not get the benefit of falling interest rates.
- Most lenders limit the amount of extra repayments that can be made each year.
- You cannot access the extra repayments until the end of the fixed term.
- You may be penalised if you pay off your home loan before the due date.
That is all good I hear you say, but should I fix my home loan?
The simple answer is there is no simple answer. It all depends on how those advantages and disadvantages mentioned above fit with your financial needs and requirements.
Let’s take Matt for example, Matt is looking to buy a house to live in with a friend. They are both sick of paying rent and want a place to call their own. Matt already has a loan on an investment property. Fixing the interest rate on the investment property would provide Matt the comfort of knowing what the repayments would be each month. Thus allowing him to focus on paying down the loan on the new property.
On the other had we’ve got Jeff. He is a high-flying professional, who regularly receives large bonuses from his employer. His priority is to pay off the home loan as quickly as possible. A variable rate loan, which allows him to make additional deposits is best suited to his needs.
That is why I invest the time with my clients so that I get to understand their financial situation, needs and requirements. So, that I can help them structure their finances so that they can achieve their goals and dreams.
In the current market, with interest rates starting to rise. Fixing the home loan may be a good strategy, but is it the right strategy for you? Give me a call today on 0428 162 602 or fill in the enquiry form here, to receive a free and no-obligation strategy session to find out if fixing is the right option for you.