There is a lot of media buzz about interest rates at the moment. It seems that every month the RBA is lifting interest rates higher. This makes everyone understandably edgy about what to do with your current loan or which way to go with your new one. But before you jump, it’s always important to assess the situation with a level head. Understanding how interest rates work can help you structure your home loan in the best way from the start.
Just remember when you do your research everyone has a different story and a different situation. In terms of home loan options, your situation is as unique as a snowflake.
Understanding how interest rates work can help you structure your home loan in line with your financial goals. It will also help you choose the right features for your home loan. Here’s how your choice could affect you:
Fixed rate option
Pros of fixing your home loan:
- Fixing your home loan means knowing what you exactly need to pay.
- Fixed repayments make it easier to plan a budget and stick to it. Use our handy budgeting tool on our website to plan your finances now.
- Fixing protects you from market fluctuations, thus providing peace of mind.
Cons of fixing your home loan:
- Fixed rate home loans are not very flexible in terms of additional repayments.
- Making extra repayments can help with paying your loan off faster, but paying your fixed home loan earlier can attract some fees.
- Many banks may not offer a 100% offset account facility with a fixed rate home loan.
- While fixed rates give protection from market fluctuations, it also means that you will not be benefitted in case the rates go down.
We have got some on our panel who offer Redraw and offset and extra repayments so you can still benefit by parking your savings in your offset and saving interest on your home loan.
Variable Rate Option
Choosing a variable rate home loan lets you ride the market wave, and you can benefit as and when the rates go down.
Lenders offer several attractive features and flexibility in variable rate loans as compared to fixed rate loans. However, interest rates and repayments are unpredictable when you choose a floating rate option.
It is also possible to partially fix your loan – this lets you benefit from changes in the market without exposing your entire home loan to risk.
Pros of variable rate home loan:
- Variable rate loans provide ample room for flexibility. Most lenders allow unlimited extra repayments at no cost at all, helping wash off years as well as interest from your home loan.
- 100% offset account facility, redraw facility for additional payments as well as several other attractive home loan features can be availed in a variable rate loan.
- When interest rates go down, you pay in accordance with the prevalent rates, saving you lots of money on interest.
Cons of variable rate home loan:
- Interest rates are as unpredictable as the weather, and market fluctuations will affect how much interest you pay on your home loan.
- Uncertain repayments mean it is difficult to plan ahead. You never know how much extra you’d be paying the next month.
- Buying a home is a major financial decision and must be taken carefully. Choosing a variable rate of interest is a risky option that comes loaded with features and the possibility of higher gains. A fixed rate, on the other hand, provides mental peace as well the certainty of planning your future finances. The choice ultimately depends on you and your financial vision.
It’s really time to weigh up the comparison of a fixed rate loan v’s a variable rate loan. What are the repayments, what are the interest savings, and remember that extra interest you are paying to the bank is not coming off your loan.
Another option would be to pay your variable rate loan with a repayment based on the current fixed rate, that way you will always be ahead in your repayments and the extra money you are paying is going to the principle of your loan.
Still confused? Talk to us. It costs you nothing to talk to a broker and they can help you sift through all the options to find the right one with the right rate for your unique situation.