If you’ve been thinking about purchasing a new home or refinancing an existing mortgage, there has never been a better time thanks to interest rates sitting at historic lows, though a critical aspect to consider is whether it’s better to take out a fixed, variable or split rate home loan. This can have a significant impact on the amount of money you pay in the long run, so it’s important to compare options carefully.
With interest rates this low, it follows that a fixed loan may seem like a logical solution. At the moment, less than 20% of all owner occupied home loans are fixed, but the proportion has increased as a result of the low current figures. A fixed rate loan gives you one set interest rate for a pre-arranged loan term, which usually is one, three, or five years.
The repayments and interest rates do not change during this term. This can be quite handy when you’re trying to plan a budget, because you know exactly how much you’ll pay each month regardless of movements in interest rates.
The risk you take is that if interest rates drop, your repayment stays the same. Another potential downside of fixed loans is that you can only make limited additional repayments, and if you repay your loan early or switch to a variable rate during this term you’ll owe steep break costs.
Variable rates offer greater flexibility, free from the rigid terms associated with fixed loans. If interest rates go down, you benefit from this lower rate. You can also choose to keep your monthly repayment the same, which allows you to pay off your loan more quickly and save money over the long-term.
Yet, on the other hand, there is always the risk that interest rates will increase, along with your monthly repayments. If you’re thinking about choosing a variable loan, be sure to plan ahead to work out whether you will be able to afford the repayments should interest rates spike. Many variable rate loans offer extra features and incentives to make up for this risk, including offset accounts and low introductory rates.
Not Sure? Try a Split Rate Home Loan
There are pros and cons to both fixed and variable rate loans and a mortgage broker will be able to fully explain these. If you’re on the fence, a third option is to take advantage of both sets of benefits by splitting your loan. This allows you to have part of your loan fixed while part stays variable, for example 50% variable and 50% fixed.
This gives you some degree of security, while also retaining the option of paying extra against the variable portion of your loan with no penalty.
As you compare fixed, variable and split rate home loan options, think about your personal financial situation to find the solution that will work best for you. Are you purchasing a home for the long-term, or do you plan on selling it in the near future? Are you looking for an investment property?
Do you wish to pay off your loan as quickly as possible with additional repayments? Even experts find it difficult to predict rate changes, so these are just a few questions to ask yourself as you compare fixed, variable or a split rate home loan.