July 25, 2014
With interest rates at record lows and competition between lenders fiercer than ever, many of my clients are asking; "Should we fix our home loan?"
My answer is always the same, it depends on your circumstances weighing up the pros and cons of fixed vs variable rate home loans.
To help you decide, let's go through some of the pros and cons below: -
With variable rate loans you may;
- Make additional repayments which can reduce your loan term and the interest charged - Pro
- Redraw these addtional repayments at a later date should you need to - Pro
- Offset the amount of interest changed on your loan by placing funds in an offset account - Pro
- Adjust your repayments as long as they stay at or above the minimum required - Pro
- Repay your loan in full with no penalty - Pro
- Switch to another loan product if your circumstances change - Pro
- Benefit from any reductions in official interest rates if your lender reduces their rates also - Pro
- Be hit with any increases in official interest rates if your lender increases their rates also - Con
On the other hand, with fixed rate loans you can;
- Rest easy knowing that your interest rate and repayments are fixed for a set period of time - Pro
- Benefit from any increase in official interest rates as your interest rate remains unchanged - Pro
- Miss out on any decrease in official interest rates if your lender reduces their rates also - Con
- Be restricted in the amount you can make in addtional repayments without being penalised - Con
- Not for most fixed loans, offset funds in another account against the loan balance - Con
- Not adjust your repayments during the fixed period - Con
- Not repay the loan during the fixed term without incurring 'break costs' which could amount to thousands of dollars - Con
As you can see from the above, the pros of a variable interest rate far out weigh those of fixed rate.
If you are concerned about your repayments going up, not in a position to make additional repayments and don't foresee paying the loan off during the fixed rate period, then a fixed rate may be a good choice.
For most borrowers though, a variable rate home loan with it's flexible features will be the best choice.
If you're still not sure, spliting your loan with a portion on fixed and a portion on variable may be a viable option. In this scenario you get the best of both worlds with all the flexibility on the variable portion and the security on the fixed portion.
Of course there are many other factors to take into consideration as everyone's personal circumstances are different.
The best advice I can give is to call me on 03 9432 6070 or click on the 'contact us' tab at the top of this page. I can go through all the pros and cons relating to your situation so you can make an informed decision.