When becoming a homeowner, you might think the biggest decisions that lie ahead are where the couch should go, and what colour bathroom tiles you want. But it comes way before that – choosing the type of loan you want.
Fixed and variable interest rate home loans both have their advantages and considerations, and it really comes down to your personal situation and preference.
If you’re scratching your head and wondering ‘Should I fix my home loan?’, we’ve got a few hot tips to help you make your decision. Let ME explain.
Advantages of a fixed rate home loan.
Like some certainty? With fixed home loan rates, you can feel more secure with a set rate over a set amount of time. Since your mortgage interest rates won’t change along with market fluctuations, your repayments will stay the same for the term of the loan – usually between one and five years. It’s good for budgeting if you’re planning a big holiday, a wedding, or just want to boost your savings.
Fixed rate home loan considerations.
It’s easy to romanticise a great fixed rate, but it’s good to be clear on a few things first. A fixed rate is often locked in at a higher rate than variable, so while you might be comfortable with the idea of paying the same amount each month, if interest rates go down, you need to be okay with paying more each month than you would be on a variable rate.
There are also some restrictions that come with a fixed rate, like making extra repayments. Some lenders have a limit on how much you can additionally add to your loan while on a fixed term before potentially attracting break costs.
Also, be sure you understand the variable rate you’ll be paying once your fixed term ends, also called a ‘revert’ rate. This might be much higher than the fixed rate, so make sure you can cover any increased repayment costs.
Advantages of a variable rate home loan
Variable rates – like the name suggests – change with the market, meaning you’ll ride the highs and lows of interest rate decisions. However, they do often come with more flexibility.
You can add a redraw facility to your variable loan, which allows you to make extra repayments while lowering the interest of your loan. These extra repayments can be withdrawn, so you can still be in control of your money.
The other feature you can access on a variable loan is the ability to link an offset account. This is basically a transaction account linked to your home loan, that when added to, reduces your loans interest.
Variable rate home loan considerations.
As we mentioned, variable rates are flexible with the market, meaning you won’t always be locked into one repayment amount. That means if rates start increasing, so will your repayments.
In terms of the features available to a variable loan, some redraw facilities come with a fee, or there are restrictions to when you can redraw your supplementary funds. With offset accounts, to really make a dent on your interest, you’d want to be having a considerable amount going in. Sure, every little bit counts, but it’s worth thinking about having your salary paid into your offset, or building some hefty savings to really reap the benefits. This might not appeal to everyone, if you are set in your banking ways and don’t want to change.
Why not split your home loan?
Did you know that when it comes to home loans, you can have your cake and eat it too? Split loans let you divide different portions of your loan between fixed and variable rates – so you can enjoy some flexibility, and some certainty.
You can split it however you like, straight down the middle, or 60-40, 70-30, whatever suits you and your needs.
Is your fixed rate ending?
If the end of your fixed rate period is coming up, make sure you give yourself three months before its expiry to review your home loan. Take this time to ask yourself whether your home loan suits your lifestyle and financial situation.
When your fixed rate interest term ends, you’ll have the option to re-fix to the new current rate offer, or switch to a variable interest rate.
So, what can you do right now?
Staying on top of market trends will help you keep up to date and make an informed decision about your home loan. You can also use our Home Loan Comparison Calculator to compare our home loan rates.
Still unsure? Talk to ME.
We’re here to help you find the right loan for you. Talk to one of our ME mobile banking managers about your options.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.