Fixed Rate vs. Variable Rate Home Loans – How to choose the Perfect Home Loan?

To Fix or Not to Fix?

If you are about to buy a house or you are about to refinance your home or investment loan you may be asking yourself, should I fix my loan or not? Everyone wants to choose the perfect home loan and so, no one wants to commit the mistake of choosing the wrong loan rate type. The question is more important especially now with interest rates being at an all time low.

To help you decide you need to know – what is the difference between a fixed rate and a variable rate home loan?

What are Fixed Rate Home Loans?

With this type of loan, you will have the assurance of knowing:

>> What your repayments will be over a set period of time

>> What your interest rate charges are over the life of the loan

>> That you have the ability to plan your finances and stick to your budget, even in times of economic uncertainty

>> That when interest rates rise, your repayments will not increase

>> That you do not have to contend with varying loan payment amounts that will fluctuate with interest rate movements

> That you have the flexibility of locking in your fixed rate

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What are Variable Rate Home Loans?

It is a very popular product in the lending market and a very competitive product amongst the lenders/credit providers. It allows you to:

>> Take advantage of falling interest rates when the Reserve bank decides to drop their official rates

>> Take advantage of inclusions such as, a 100% offset account, free additional repayments and redraw facilities

>> Take advantage of the equity you have built-in your home by taking a line of credit option

>> Make unlimited extra repayment each month so you can pay off your loan faster

Do You Want a Compromise between Fixed and Variable?

If you are uncertain between choosing between a fixed or variable rate home loan, you may consider a split loan. It is also known as a split rate home loan.

A Split Rate Home Loan allows a mixture of security and flexibility, such as:

>> A portion of the repayments can be at a fixed rate, and

>> Another portion of the repayments can be at a variable rate

What will I lose by Fixing my Home Loan?

Here are the disadvantages of fixing your home loan:

>> Interest rate drops will annoy you – If interest rates go down below your fixed rate, you will be repaying more than the variable rate and you will not benefit from the rate drop

>> Can I make extra repayments? – Extra loan repayments are often not allowed if you have chosen a fixed rate, or may only be allowed with a fee. Variable rate home loans usually allow you to make extra repayments at no cost

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