A consideration many have when deciding on a home loan, ‘should I go for a fixed or variable rate?’ With pros and cons for each option, one may suit better for your financial goals than the other. Importantly it is wise to know the differences and how each can benefit.
A fixed rate home loan is where you lock in your rate for a specific period of time. Typically most lenders offer fixed rate loans ranging from 1 – 5 years, with the ability to fix in for longer periods depending on the lender. The advantage of fixing in is that you avoid the risk of your interest rate rising and increasing monthly commitment. This gives stability and allows you to budget around the mortgage, as you’ll know exactly what the monthly repayments are for the term elected to fix in. The disadvantages are if rates reduce, you’ll be locked in missing out on potential savings. Also there can be penalties payable if you pay off or refinance your loan during the fixed rate period as well as limitations in making additional repayments.
Variable rate home loans can change at any time, usually triggered by cash rate changes however as we’ve recently seen can also change at the lenders discretion. Generally speaking if the cash rate drops, so should your variable loan and so to your monthly repayment. However if rates rise, repayments will increase also. This can make it difficult to budget from month to month, given the unpredictability. You do have ultimate flexibility in the sense you can make as many additional repayments – so you can pay your loan off quicker if you wish.
Split – Fixed and Variable Combination
Splitting your loan between fixed and variable allows you to hedge and get the best of both worlds. The catch here is that you won’t get the full benefits of either. Most lenders will allow you to split the loan and it doesn’t have to be a 50/50 split, in most cases you can look at splitting the loan as you please – be it 90/10, 60/40, the choice is yours!
What to do?
There will always be a risk to go fixed or variable, the option that is selected should be best suited to your financial needs. Keep your own financial goals in mind, taking into account income streams, future plans and the need for security or flexibility.
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