September 26, 2012
Have you found the perfect family home, but are unsure about which home loan to choose to finance your property dream? Before taking the next step, it is important to understand what you will need out of your home loan and the benefits and pitfalls of each loan type.
There are often comments in the media about whether borrowers are better off fixing their home loan interest rates. When entering the fixed vs variable decision process, borrowers should think about their current lifestyle and needs as well as their future plans and goals.
Variable and fixed rate loans both have pros and cons to be considered, which are based around the loan flexibility, features and costs.
Put simply, variable rate loans tend to be more flexible in nature (with features as well as the interest rate) and you can take advantage of falls in interest rates. But when rates rise so to do your repayments.
On the other hand, fixed rate home loans allow you peace of mind, knowing what your repayment amount will be for a set period of time.
However, it is also important to remember that once you are locked into a fixed loan, you can incur break costs and a switch fee to move away from that loan type during the fixed period. The cost involved with breaking a fixed rate term can be quite high depending on when and how long you fixed for and what the interest rate was at the time compared to where it now sits.
Another point that borrowers need to note is the fact that fixed rate loans will not always offer features such as offset, redraw, or the ability to make unlimited extra payments without penalty.
But, given fixed rates are currently at five years lows, borrowers are increasingly being lured to this loan type. Our latest loan approval data shows one in five new borrowers is opting for a fixed rate loan.
Whilst fixed rates can be lower than variable rates from time to time, borrowers should keep in that they could end up fixing their rate only to find that interest rates move south, leaving them with a higher rate.
If you are thinking of switching from a variable rate loan to a fixed rate, you should really weigh up the pros and cons before locking in. If applying for a fixed rate home loan keep in mind that its interest rate may move down (or up) between application and settlement. Some lenders may offer a fixed rate cap, which if on the loan settlement date the advertised rate has fallen below your capped rate then you will benefit from the new, lower fixed rate.
Another idea that borrowers may like to consider would be splitting their loan amount across part fixed and part variable. This might serve as a good compromise for those seeking some stability along with flexibility.
All in all, there are risks and benefits with both types of loans. The key is to educate yourself as much as possible by researching your options, ie. take into considerations the wide range of loans and lenders available and what affect interest rate rises will have on your repayment strategy.
Self-education is so important, as is taking ownership over your mortgage situation. After all, your mortgage is one of the biggest financial decisions you will make, so don’t make it lightly.
For more information contact Richard Windeyer on 1800 01 LOAN or click here to "Book a Meeting"