The decision to fix a home loan or keep it variable is very difficult for some. Both have their advantages and disadvantages and need to be considered carefully. Interest rates are at historical lows and fixed rates remain lower than the average standard variable rate, however we have recently seen several major banks move and increase their fixed rates. So is now the time to fix or not?
If you decide to fix, make sure you are fixing for all the right reasons not just the lure of a cheap rate. Be fully informed of the implications of locking into a fixed rate as you don’t want to later regret your decision if variable rates drop, which seems unlikely at this point, or your personal situation changes where it is necessary to revise your financial situation.
The insurance of fixing:
Choosing a fixed loan is similar to buying an insurance policy, it gives you certainty over a period of time. A fixed rate loan can be a good option if you’re on a tight budget because it allows you to know exactly how much each repayment will be, irrespective of interest rate movements. This also, however means that when interest rates drop below the interest rate at which you’ve fixed your loan, your repayments would be higher than they would be if you had a variable rate loan.
One of the downsides of fixing is that many fixed loans charge for extra repayments and have heavy fees associated with an early pay out. Seek advice before you sign the contract on how any exit fees are calculated in case you have to sell or refinance within the set term. The longer the set rate period you have in place the higher the cost associated with the fees because the lender has to compensate themselves for the loss of re-lending the money at a lower rate.
The ups and downs of variables:
Variable loans have more features and greater flexibility than fixed rate loans but as the rate fluctuates according to various market conditions they can be risky if you’ve over capitalised on your loan. With a variable rate home loan, your repayments will reduce when interest rates go down. Alternatively, you may be able to keep your monthly repayments the same, helping you pay of your loan sooner, and saving money over the life of the loan.
If your variable rate falls, you may be making lower repayments than if you had fixed your rate but if the variable rate rises, your monthly repayments increase. When choosing a variable it’s important to plan for the possibility of rate rises and be able to adjust your budget accordingly.
Options:
Other than choosing to fix the entire loan amount you may choose to split the loan. Split rate loans allow you to divide your loan between fixed and variable rates, which gives you a foot in both camps
Fixed or variable home loan check list:
Some things worth considering when deciding on whether to fix, split or have a variable rate home loan.
- Do you want certainty of predictable payment amounts?
- Do you anticipate any major changes to your family arrangements, your job or your business?
- Are you thinking of selling your property in the near future?
- Are you thinking of buying an investment property?
- Do you anticipate making additional repayments on top of your monthly repayments?
The answers to these questions will help you to think about what is the most suitable option for you. Please contact Konnect to find out how we can help.