There are several elements and factors that go into determining which home loan product is best for you and interest rate is often front of mind.
Even if you’re not thinking about buying a house just yet, you’ve probably heard of the terms ‘fixed’ and ‘variable’ rates on the news or around the office water cooler, within the context home loans.
They’re often referenced in advertising for home loans and a quick review of google terms latterly, it’s easy to see that many aren’t quite sure what each mean (or the pro’s or cons of either). So, what do they actually mean?
Fixed Rate Home Loans
When you take out a fixed rate loan, your interest rate is locked in for the fixed rate period. Movements in Interest Rates (both increases and decreases) will not affect your loan during the fixed rate period.
By locking in your rate it means that your repayments will remain the same despite any rate rises or drops that may happen during that term. This predictability will create peace of mind and should allow you to focus on other financial goals.
On the flip side, you won’t benefit from any rate drop and there may be break or exit fees if you wish to change the nature of your home loan rate.
Typically, the fixed rate term will last for 1 to 5 years, although this will depend on your situation and lender. After the term is over, your mortgage will revert to the standard variable rate.
Fixed rate home loans may also have less flexibility around access to offset and redraw facilities, whilst not all lenders will allow you to make extra repayments.
We recommend that you obtain financial advice when contemplating a decision to fix your interest rate as the break cost fee that may apply could be substantial depending on the movement of the wholesale funding market between the time you fix your rate and the time you break it or repay it early.
Variable Rate Home Loans
As you may have guess, variable rate home loans mean the interest rate which impacts your repayments may change. This is greatly impacted by market conditions and elements such as the official cash rate set by the Reserve Bank of Australia (RBA).
For borrowers, this means that the rate you end up paying may fluctuate up or down within months of taking out the loan – if the rate drops, so will your repayments. However, if there is a raise in the interest rate, you may be faced with higher repayments than when you started.
There are typically two types of variable rate home loans: standard variable loans and basic variable loans. Standard variable loans may have optional components attached like redraw and offset accounts. These can offer added flexibility to your financial situation should your circumstances change.
Which Is Best?
As with many financial products, the best is entirely dependent on your circumstances and goals.
Typically, a fixed rate home loan provides you with certainty over the immediate future and may be useful for first home buyers who are entering the market. Variable rate loans are often useful for those looking at redraw facilities for renovations, or when you’re looking to take advantage of dropping interest rates. With either it’s important to also look at the Comparison rate which gives you a clue as to how many hidden fees may be lurking on top – be wary of a big jump from the rate advertised, and the comparison rate.
As mentioned above, it’s important to seek sound financial advice when comparing home loan options. You may go to your friends for advice when it comes to which TV is best, but seeking their advice around home loans may be dangerous given the variables and differences in circumstances. Talk to a professional, do some research and remember, what may be right for others might not be right for you and your future so never be afraid to ask questions.
Disclaimer: The ideas, discussions, options and details expressed in SCCU Blogs are for general informational purposes only and are not intended to provide specific personal advice or recommendations for any individual or on any specific security or investment product. We intended only to provide education about the financial and banking industry to make the complex simple, and help everyday customers realise their dreams.