Fixed or variable home loans…. What does it all mean?
With interest rates currently at historical lows, fixed rates have been advocated by some industry bodies to offset any inevitable rate rises. Predicting rate rises or drops currently is we think akin to staring at a crystal ball! Our latest blog explains the good and bad of fixed rates and the importance of remaining informed.
There certainly is some variation in views regarding the future of rates amongst some senior Economists. Shane Papadopoulos commented on Nov 7 that: “…..it’s looking increasingly likely that the RBA will go through 2014 with no rate change. It’s been a year now since the RBA last moved the cash rate, and there are only four more policy meetings this year (and only one more inflation increase in October for Q3). NAB still expects the next move to be up in late 2015.”
Alternatively, Senior Economist from Domain group, Andrew Wilson stated recently that: “I think the case is certainly stronger for lower interest rates than higher interest rates at the moment given rising unemployment, falling building approvals, a volatile stock market, a still too high dollar and falling house prices. We will have to start seeing an improvement in the economy, and certainly no more deterioration in those key indicators, to maybe offset a cut in interest rates some time in 2015.”
So should you fix your rate or not?
Before making the decision of whether to fix part or all of your loan it is important to be as informed as you can. Also, having an overall financial objective will assist you to know whether this arrangement will suit you both in the short and the long term. Understanding how it all works is crucial and that’s where a good Broker such as Herman Esterhuizen or Mark Wilkins from Mortgage Choice can help to assist you to make an informed choice.
What exactly is a fixed rate?
A fixed rate is an interest rate on your home loan that doesn’t alter for a period of usually 1, 3 or 5 years, regardless of what rate fluctuations occur as a result of RBA decisions and lender alterations. A home loan can be totally fixed or partially, depending on the product and lender.
What are the advantages and disadvantages of locking your home loan into a fixed rate for a period of time?
• Rate rises won’t affect loan repayments. Hence you are safeguarded from lender increases above your fixed rate.
• Repayments remain the same for the period that the loan is fixed for. This may be useful for first home buyers who are new to making regular home loan repayments or for investors who may be working within a tight cash flow.
• There are a variety of fixed rate products available by many lenders, from 6 months up to 15 years.
• Because the rate is fixed, any lender rate drop below yours will mean that you are paying more than the current variable rate for the remaining period that your loan is fixed for.
• Extra repayments are generally limited and can attract fees, meaning it is hard to get too far ahead on paying your loan off.
• Fixed rate products often have limited “bells and whistles.” Features such as offset accounts and redraw facilities may be available but can attract a fee.
• Changing back to a variable rate once you are locked into a fixed rate can also attract hefty fees.
• The theme of fees continues when you pay of a fixed home loan early. An early repayment fee can also apply.
Remember knowledge is king!
Scott from Mortgage Choice is a home loan expert. Call him on 1800 17 16 15 if you are interested in fixing all or part of your home loan. He will visit you at a time and place that suits and will assess your individual situation whilst providing useful knowledge and of course great customer service.