Should I fix my home loan?

There has been a lot of commentary lately about Home Loan rates being as low as 2.99% and with the Reserve Bank to soon meet again, there may be more reductions on the way.

Many Mortgage Owners are contemplating ‘fixing’ their loan rates, so it’s important to understand the differences between fixed and variable home loans:

What is a fixed rate home loan?

A fixed interest rate home loan is a loan with the option to lock in (or ‘fix’) your interest rate for a set period (usually between one and five years). One of the main advantages of this is cash-flow certainty. By knowing exactly what your repayments will be, you’ll be able to plan ahead and budget for the future. This factor often makes fixed rate home loans very popular for investors over the first 2-3 years they own a property.

A fixed rate loan may be a good option in a rising loan market as any interest rate rises won’t affect the amount of interest you are required to pay. However, if interest rates drop, you might be paying more than someone who has a variable rate home loan.

It’s important to note there may be a number of restrictions associated with fixed rate loans. Often additional repayments are not permitted with fixed-rate loans (or you may be charged a fee). As there is a restriction on extra repayments, the ability to redraw is also frequently not offered on a fixed rate loans, effectively reducing the flexibility of the loan.

What is a variable rate home loan?

A variable rate home loan is a loan where your interest rate will move (or ‘vary’) with changes to the market. This means your interest rate can rise or fall over the term of your loan. Variable home loans may have appealing features like the ability to make extra repayments, often at no extra cost to help you pay down your loan sooner, saving you interest. Variable rate loans may also include unlimited redraws, allowing you ‘draw’ back any extra repayments you have made.

Variable rate loans are more uncertain than fixed interest loans. This can make budgeting for your interest payments more difficult as you need to take into account potential rate rises. If you aren’t prepared, you could have trouble keeping up with repayments.

It is common practice for the banks to not pass on rate cuts to existing and established customers and with interest rates being at record lows and the possibility of further reductions, it is a good time to consider what you should do with your current loan. If it has been 2 years or more since you have had your loan reviewed, then now is the perfect time to call our Mortgage Broker – Warren Richards on ph: 9851 0300 to arrange an appointment.