With interest rates being the lowest that they’ve been for more than 50-years and economists predicting that rates will rise at the end of 2014, many home loan holders are asking, “Is now the right time to fix my home loan interest rate?” The answer to this question is based on you and your own financial circumstances.
What is right financially for you, may not be right financially for the person standing next to you. So in order for you to work out whether or not now is the right time to fix your home loan rate, you need to understand what each of these home loans offer you, and if this fits in with your personal and financial circumstances. Let’s look at fixed and variable rate home loans in greater detail.
Fixed Rate Home Loan
Fixed rate home loans offer you a fixed interest rate for a specified time frame. In most cases, these time frames range from 1 to 5-years. But, there are some lenders in Australia who will fix home loan terms for as long as 10 to 15-years.
Fixed terms are best suited to home loan holders who are staying in their home long-term. If you are thinking of selling, then leave your home loan at a variable rate. Otherwise, you may find that the fees you have to pay to break your fixed rate home loan contract will outweigh any savings you have made.
Of course, the general rule of thumb when locking in any interest rate is the lower the rate, the better. So, if you think rates won’t get any lower and you’re staying put, then a fixed rate home loan is ideal. This is because fixed rate home loans can save you are great deal in interest over the fixed term, and they are an excellent budgeting tool as you know how much your mortgage repayments will be each month.
Variable Rate Home Loan
Variable rate home loans change with the official cash rate. This means that interest rates go up and down over the term of your home loan and that you can pay more or less interest per month if, and when, the variable interest rate fluctuates.
A variable rate home loan offers you flexibility. You can exit this type of home loan without incurring any exit fees or break costs, which can add thousands to your mortgage. You can also take advantage of features such as offset accounts and redraw facilities and make lump sum payments off your mortgage without incurring any penalties.
Variable Rate Home Loan and Variable Compared
Still confused? Then look at following table which compares these home loans for you.
|Fixed Rate||Variable Rate|
|Interest is fixed. Repayments stay the same.||Interest is variable. Repayment value can change at any time.|
|You can budget accurately.||Additional funds may be needed to cover monthly spending.|
|Extra repayments may incur a penalty.||Extra repayments may incur a penalty. Lump sum and additional repayments can be made. No penalties apply.|
|Minimal or no features.||Numerous features are available.|
|Loan is not suitable for construction, off-the-plan, bridging or business purposes.||Loan is suitable for all purposes except for business.|
|No introductory rate.||Introductory rates may apply.|
|Loan reverts to standard variable rate after the loan term has expired.||Loan rate typically rises and falls with the current market rate.|
|Break fees and other costs apply if the loan term is broken.||No break fees apply.|