To fix or not to fix? We explain the difference between fixed and variable rate loans, and the pros and cons of fixing your rate. So you can decide which type of home loan is best for you.
A fixed rate home loan has an interest rate locked in for a specified time (usually up to five years), regardless of changes to interest rates. Which means your loan repayments will stay the same over the fixed period. She be fixed.
A variable rate loan has an interest rate that can fluctuate, depending on changes to the cash rate (link to other article about RBA). This means your repayment amount can change too. Change, vary, variable. You’re getting it now, right?
Pros of going fixed.
1. Reliability. You’ll have the security of knowing your repayments won’t change for the time that your rate is fixed. It makes budgeting easier, because you’ll have certainty about how much of your income you need to put aside for your loan repayments.
2. You think rates will rise. If interest rates rise, fixing your rate will secure a lower rate and could save you money over the long term. Yahoo.
Cons of going fixed.
1. Less flexibility. Lenders have more rules around fixed rate loans, including rather large fees for breaking your contract before the fixed period ends. If you’re planning to move house soon or not sure what the short-term future holds, it may be best to go with a variable rate.
2. No additional repayments. With a fixed rate loan, you won’t be able to dump extra cash on your loan to reduce your loan balance. If shortening your loan term is a priority, a variable rate may be more suitable, as you can make additional repayments, whenever you want. More repayments = shorter loan term = less interest = lower cost for you. And that’s an equation we can all get behind.
3. You think rates will fall. If rates fall, you could end up paying more interest that you would have done with a variable rate. Bah humbug.
Why do rates matter so much?
The rate on your home loan dictates how much interest you will pay on your borrowed amount, over the life of the loan. Even a small change in rate can make a big difference over the 30-year loan term.
For example, if you had a rate of 5.0% and interest rates fell in the first year by 0.25%, your monthly repayments would drop by about $100 a month, on a loan of $700,000. And you would save around $38,000 in interest over a 30-year loan term. That’s your Netflix subscription covered for 3,800 months.
Applying for a Tic:Toc home loan.
We’ll ask you some questions and provide you with loan options we think will suit you best – whether that be fixed or variable. But the decision will be all yours. Have more questions? Let’s talk.