With some very attractive fixed rate loans currently on the market, fixing your home loan might seem appealing – but is it right for you?
A home loan with a fixed interest rate can be a great option for borrowers who want to have certainty around their repayments and who are looking to keep to a strict budget.
The type of rate you choose, however, should be based on your personal situation and how you intend to use your home loan.
A fixed rate loan is taken out for a set period of time, usually three to five years, while a variable rate home loan fluctuates with the market and is subject to rate changes, such as those made by the Reserve Bank.
But there are some downsides. These include being locked in for a period of time during which the standard variable rate falls but your fixed rate, of course, remains the same.
Fixed rate home loans can also be quite restrictive. In most cases they don’t allow the borrower to drive down their mortgage through extra or early repayments.
Once locked in to a fixed rate loan, it can be very expensive to get out, so timing is crucial to ensuring you secure a favourable rate and avoid large cancellation fees.
On the other hand, a variable rate allows flexibility and usually comes with features such as redraw facilities and the ability to make early repayments.
Remember though that if you are on a flexible term be sure to budget for rate increases as these may occur at any time and could impact your ability to repay the loan. As a rule of thumb, it is a good idea to have a savings ‘buffer’ of around three to four per cent.
Regardless of whether you choose a fixed or a variable rate loan, there are several additional features that lenders can offer. The most common are redraw facilities, offset accounts, extra repayments and interest-only payments.
It is important to check the fine print and conditions of use to ensure you don’t get hit with any additional fees or surcharges to use these features.
Another option that might benefit you is a split loan, in which some of the money you borrow has a fixed interest rate attached to it and some has a variable rate.
With this option, you can fix a percentage of your loan while still having the flexibility to pay off at least some of your mortgage ahead of time. A split loan allows you to hedge your bets and spread the risk.
A fixed rate loan could be just what you need to help bring some stability to your mortgage repayments.