To fix or not to fix? Fixed interest rates explained

Home loan interest rates are currently at their most competitive levels for some time. We are seeing loads of options for home buyers, in particular some great fixed rates. So should you lock in to a fixed interest rate mortgage or are you better off with a variable rate loan? What are the pros and cons of getting a fixed interest rate loan now?

The benefits.

The major benefit of a fixed interest rate mortgage is stability. You can usually lock in your interest rates for a period of one, two or five years and be protected from interest rate rises during your fixed interest rate period. It means you know exactly how much your monthly mortgage repayments will be and this makes money management easier.

Fixed interest rate mortgages are popular with first home-buyers and first time property investors for this reason. Fixed rates are a great idea when the market is volatile and interest rates are on the rise, because you always know how much you will have to pay and may make great savings if interest rates go up whilst you are in the fixed interest period of your loan.

So if you fix your loan interest rate whilst rates are at the bottom of the market, you can reap the benefits of a secure, low rate while the rest of the market bears the risk of higher interest rates being introduced. The trick is to fix your interest rate whilst they are at their lowest point.

At the moment, fixed rate loans are being offered at up to a quarter per cent lower than variable rate loans and it may make them sound like a good idea. But the recent market trend has seen interest rates falling and the current difference in savings between a fixed interest rate and a variable interest rate may not be enough incentive to lock in your rate at this time.

The disadvantages.

Fixed interest rate loans have some important policies you need to be aware of.  Picking the right time to fix your interest rate is important. If you pick the wrong time to fix your interest rate, you could end up paying a lot more interest than you would otherwise have to pay on a variable rate mortgage if interest rates happen to fall. That could leave you wishing you had chosen a variable rate loan instead.

Fixed interest rate loans also carry some other disadvantages. They can carry hefty exit fees, so if interest rates fall while you’re in the fixed period of your loan, you are pretty much locked in.

They can also be basic, no frills packages that may prevent you from paying your loan off faster.

If you have a variable interest rate loan and interest rates fall, you may be able to afford to make extra repayments to get ahead on your loan, but this usually isn’t possible with most fixed interest rate mortgages. Making extra repayments early on in the loan can make a big difference to how much interest you pay down the track. And you can usually redraw the money if you need it.

So, to fix or not to fix? Sourcing the best mortgage involves more than just looking for the cheapest rate. There are other things you need to consider such as the ongoing fees and charges, the loan’s flexibility and the level of service the lender provides.

And with fixed interest rate loans, timing is everything.

The best course of action is to consult your Professional Lending Specialist from Loan Wize. That way, you can get some great information about timing the market, find out which mortgage is right for you and ensure you get the best deal available to suit your personal circumstances.

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