A drop in fixed rates by a number of banks and lenders has increased the number of borrowers who are fixing their home loans
If you decide to do the same, make sure you are fixing for all the right reasons not just the lure of a cheap rate. Be fully informed of the implications of locking into a fixed rate as you don’t want to later regret your decision if variable rates drop.
Your financial situation and personal preferences should always be the guiding factors in whether to choose a fixed or variable home loan. Both loan types have their pros and cons so talk to us for the best advice about what product suits your budget and lifestyle.
The insurance of fixing
Choosing a fixed loan is similar to buying an insurance policy; it gives you certainty over a period of time. In the current climate of global economic upheaval, a fixed rate can be a good option if you are on a tight budget because it allows you to know exactly how much each repayment will be.
On the downside, many fixed loans charge for extra repayments and early payout (break fees). Seek advice before you sign the contract on how the break fees are calculated in case you have to sell or refinance within the set term. The more rates fall, the higher the break cost because the re-financer has to compensate themselves for the loss of re-lending the money at a lower rate.
The ups and downs of variables
Variable loans have more features and greater flexibility than fixed loans but as the rate fluctuates according to various market conditions they can be risky if you’ve overcapitalised on your loan.
If your variable rate falls, you may be making lower repayments than if you had fixed your rate but if the variable rate rises, your monthly repayments increase. When choosing a variable it’s important to plan for the possibility of rate rises and be able to adjust your budget accordingly.
Split rate and capped loans are hybrids between fixed and variable loans.
Split rate loans allow you to divide your loan between fixed and variable interest rates, which gives you a foot in both camps.
Capped loans are often offered as honeymoon or introductory loans and under this type of loan the interest rate is fixed for the capped period. During this period, the interest rate cannot go higher but it may go lower if the lender’s standard variable interest rate falls below the capped rate.