To fix or not to fix
If you're about to buy a house or you're looking to refinance you may be asking yourself, should I fix my home loan or not?
Like most decisions, there are pros and cons for each option.
Here are some things to think about to help you decide.
Fixed home loans have an interest rate that is fixed for a set period of time - often 1, 3 or 5 years.
At the end of the fixed rate term, the loan will usually switch to the standard variable rate offered by the lender.
Here are some advantages of fixing your home loan:
But there are some disadvantages with fixing your loan:
This kind of loan may not be suitable if you are thinking about selling your home or want the freedom to switch home loans if you find a better deal.
Get an indication of how much your repayments might be with a fixed home loan.
If you don't fix your loan, your interest rate will move with changes to market interest rates.
This means the interest rate can rise or fall over the term of your loan. As a result, your repayments will 'vary' as the rate changes.
Here are some advantages of a variable rate home loan:
Here are some disadvantages of a variable rate loan:
Another option is to make a bet both ways by having a part fixed, part variable interest loan. A split loan allows you to manage some of the risks of interest rate rises while still being able to make extra repayments.
There's generally no limit to the way you can split the loan, so you can allocate the funds 50/50 or 20/80 - the decision is up to you.
Whatever loan you decide to take out, it needs to work for you. That means the loan should have the features, flexibility and fees that are the most appropriate for your needs.
If you want to sit down with a mortgage broker who can walk you through the right process and information that will enable you to make the right decision, contact us and we would be happy to help.
Adam and Matti have saved up a deposit and want to borrow $440,000 for a $600,000 apartment.
Using MoneySmart's mortgage calculator they work out what their repayments will be for a fixed or variable rate loan:
The fixed rate will cost them $62 more per month to start with but it will save them money in the future if the variable rate increases. The variable rate is tempting because they would pay less right now and have the flexibility to make extra repayments without fees.
Matti and Adam know their budget will be tight over the next couple of years (they plan to travel and get married) and they think they will be stressed if there is a big jump in their mortgage payments.
They decide to fix two-thirds of their home loan for 3 years so they can still make extra repayments if they have extra money.
*Based on a 25-year loan with fees of $10 a month.