Taking out a home loan is a big financial decision, probably one of the biggest you’ll make in your lifetime. This is why you need to consider fixed and variable rates before you sign any contract.
Why? Well both home loan types can have a positive or negative impact on your financial circumstances, where over time your choice can either cost or save you a lot of money and stress. Let’s look at the facts in greater detail to understand how this works.
The Australian Economy
At present, the Australian economy is sitting idle. It’s not struggling and it’s not booming. But after the Global Financial Crisis (GFC) one fact that we’ve all become highly aware of is that the Reserve Bank of Australia (RBA), which once dictated to the rise and fall of home loan interest rates, no longer dictates to lender rates.
The big four banks, Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), Westpac and ANZ have proven this countless times by not passing on the full amount of a RBA rate cut to consumers. This, of course, has angered many home loan holders who’ve felt hard done by.
To Fix or Not to Fix Your Home Loan
However, CBA, NAB and Westpac recently dropped their 5-fixed rate home loan to 4.99 percent, and the ANZ to 5.49 percent. These are the lowest fixed rate loans ever witnessed. So locking in one of these rates now could be a smart financial move, especially when it’s predicted that rates could rise in 2015 sometime.
Fixing your home loan, at these rates, can save you money over the term of the fixed period. For instance, a 5-year fixed rate of 4.99 on a $300,000 mortgage can save you approximately $50.00 a month, when compared to current variable rates. Over the term of the loan this is a $3060 saving. But, if the variable rates rise, then you could save yourself considerably more.
But, while you’ll have rate certainty for 5-years you’re taking a risk. For instance:
If rates fall, you’ll be paying more than you have to.
If your personal or financial circumstances change and you need to sell your home, then you may have to pay break fees, which can add thousands to the cost of your home loan.
You cannot pay more off your home loan if it’s fixed. Well, not without incurring a penalty fee.
You may be subjected to ‘rate shock’. This occurs when your fixed rate term ends and you’re subjected to the variable market rate, where, in some cases, your home loan rate jumps significantly. Some home loan holders then struggle to find the extra money needed for their home loan repayment when their rate changes.
So before you make a decision about your rate type, you need to consider your own circumstances now and well into the future. Calculate the costs and possible savings you could make, then decide based on the facts.
Do you want to know more about fixed rate home loans? Then contact eChoice and find the right home loan for you.
Written by eChoice