Fixed, Variable or Split Rate Home Loans?
When purchasing property or refinancing, you need to make a decision on the type of loan that will best suit your needs. Do you want a fixed interest rate, variable interest rate or perhaps a split facility which is a mixture of both?
No one can give you a definitive answer to this question and you should not let yourself be persuaded by a banker, mortgage broker or anyone else to take a particular type of loan. The best thing you can do is get as much information as possible about the different types of loans and the factors that affect these loans. This way you can make an informed decision, taking into account your own financial goals, your income stream and your need for flexibility or security.
Fixed Rate Home Loans
A fixed rate home loan is taken out for a set period of time, generally 1 to 5 years, with a set interest rate. This type of loan enables you to carefully budget your repayments. Knowing exactly how much your repayments will be allows you to plan accordingly and gives you a degree of certainty and security.
In many cases, the terms and conditions of a fixed rate loan can be a lot less flexible than a variable loan so you need to make sure these terms suit your needs. Consider what the early exit fees are, does the loan have a redraw facility? and do you have the ability to make extra repayments?
Variable Rate Home Loans
A variable rate home loan means the interest rate you pay on your loan fluctuates depending on your banks interest rate rises and falls. A variable rate loan, in most cases, provides more options and flexibility than a fixed rate loan. These loans can be risky in a rising interest rate market if you’ve taken a loan at the threshold of your affordability. It is vital when taking out a variable rate loan that you plan and budget for increases in interest rates. You need to ensure that you’re able to meet your repayment obligations should rates rise. Some variable rate loans can have low introductory or “honeymoon” rates for an initial period before reverting to a lesser discounted or no discounted rate. When considering a honeymoon rate ensure that you can afford the repayments post the honeymoon period.
Split Rate Loan
Lenders also offer the option of splitting your loan with a percentage at a fixed rate and the rest at a variable rate. This is an option to consider if you need some security, but also want the chance to pay off some of your loan ahead of time.
Predicting Interest Rates
There is always a lot of speculation in the media and the finance industry on what will happen with interest rates over the coming months and years but in truth, it is impossible to accurately predict where interest rates will go.
Inflation is one of the greatest influencers of interest rates. Inflation is the rate of increase in the prices of goods and services. The main goal of the Reserve Bank of Australia is to maintain the inflation rate between 2-3%. This is done by increasing or decreasing interest rates. If inflation is rising too fast, interest rates will be increased to discourage consumer spending, thus slowing the inflation. Alternately, if inflation is not increasing rapidly enough, then the RBA will decrease interest rates, which encourages consumer spending and causes an increase in the rate of inflation.
Making Your Decision
Choosing the right loan is not just about which lender you use or the current interest rate they are charging, it’s about finding a product that has the terms and conditions to suit your needs now, and over the life of your loan. The team at Assured lending are not just Mortgage Brokers, we are property lending experts with a wealth of knowledge, who will give you all the information you need to make an informed decision. We also take the time to understand your financial position and short, medium and long terms goals so that we can assist in guiding you to the right lender and product that dove tails in with your aspirations.