With interest rates a current topic of conversation, many clients are asking question: Do we fix our loan or is it better to have a variable rate?
Which loan is right for me?
Well, that all depends in your circumstances. Variable and fixed los have their advantages and disadvantages so it is imperative to consider these before making a decision. Split loans combine features of both variable and fixed loans allowing you to broaden your options.
Variable Loans
Advantages
- When the Reserve Bank or the market lowers rates these savings will usually be passed on to you.
- You can make additional repayments without incurring a penalty then have the option to redraw the additional funds at a later date.
- Provides more flexibility than other types of loans.
Disadvantages
- When the Reserve Bank or market increases rates, the interest rates on your loan will also increase – meaning you will pay more interest.
Fixed Loans
Advantages
- During the fixed period, if interest rates go up your loan interest rate and repayments won’t change.
- Budgeting is easier, giving you security over your financial situation.
Disadvantages
- When market rates go down, the rate on your loan will remain the same so you won’t have the benefit of potential savings.
- Most fixed loans limit the flexibility of being able to make extra repayments t repay your loan early. Some lenders allow extra payments for a fee; however you are not able to redraw the extra repayments during the fixed rate period.
- If you choose to exit or switch your loan, there may be early termination fees.
Features to consider
It is important not to judge a home loan solely on the interest rates. Be aware of other fees including up front fees, ongoing monthly fees, exit fees, and ‘deferred’ establishment fees which are often charged f you leave a variable loan in the first 5 years. We can help you review the costs and benefits of extra features which may save you money such as an offset account or redraw facility.
Other loan features to pay attention to include lenders waiving fees and charges to other accounts held with them, such as monthly transaction account keeping fees. Make sure extra payments are not penalised. Some loans, such as fixed loans and some no-frills variable loans, may limit the amount by which you can reduce your loan.
How easy is it to switch to another home loan?
Many people end up paying more than they need by staying in an incorrect loan because they think it is ‘too hard’ to investigate switching to another option. We research alternative products available for you and if changing products is the right solution for your situation then we help make the process as smooth as possible.
Remember, there may be large costs such as rate break fees to refinance and discharge the current loan and you might lose access to your funds for a period of time. Standard costs such as stamp duty and registration will also apply (although in some states you may be exempt for paying stamp duty.)
Call us for more information about how interest rates will affect your situation or help in determining whether fixed or variable is the best option for you.