Fixed or Variable?
Interest rates: To be flexible or to have security, that is the question!
What do you need from your home loan? It is important to think about what you need, here are some things that may make it easier to understand the difference between choosing a fixed or a variable interest rate home loan each with its pros and cons.
Before you read on I invite you to keep these questions in mind. What does fixing my interest rate really mean? How can a variable interest rate (flexible rate) benefit me? What is my current interest rate? What loan features do I need? Do I want access to excess repayments I’ve made towards my loan?
Fixed Interest Rate (How to build security and stability):
A fixed interest rate is when your rate stays the same for a fixed period of time. Majority of lenders offer fixed terms that range from 1-5 years however some lenders may even look to up to 15 years.
Having a fixed rate is the way to go if you are seeking security and stability in your loan. It allows you to predict the repayments of your loan for that fixed period of time which makes budgeting easier and you feel safe knowing you control the amount of years.
It is important to understand that usually, you will find that if you were to break a fixed interest rate term you will usually be charged significant extra costs. Something else to bear in mind, a fixed interest rate may be slightly higher than a variable interest rate and there may be additional costs in the beginning to fix your interest rate. The reason for the fixed interest rate being slightly higher is the lender takes consideration of the cost of holding money at a certain rate for a certain amount of time. Do not let this detour you though, as rates on the market can be unpredictable and may get higher, it just depends on your situation and your personal needs. It is best to speak with a home loan specialist so that they can provide you with the best option.
Variable Interest Rate: “How to get that flexibility and to take advantage of current low rates”
A variable interest rate is determined by the current market. This is a great option if low rates have been maintaining, it also leaves the window open for when the rates do get low if it is high currently. The sum of your home loan repayments would be a reflection of the market conditions.
The Reserve Bank of Australia’s “cash rate” is how interest rates are calculated. It may be something that you would like to inquire about or keep your eye out for on the news to keep up to date. A quick indication, in the majority of the cases, when the economy is lower than usual you will see the cash rate go down, on the flip side when the economy is doing well the cash rate goes up.
If you are not too fussed about a tight budget and your loan repayments are for your investment property some take advantage of the variable rates. Variable rates can go high depending on the economy, some like to use this to their advantage as come tax time this (investment property) can assist with tax returns. I suggest that you discuss this further with your accountant about the many benefits of your current situation.
Finally, a variable interest rate home loans majority of the time do come with additional features and flexibility, for example, redraw facility, ability to make extra payments. Ensure you inquire with your home loan specialists about the features of your home loan, they will assist you to get the best on offer to satisfy your needs.