Pros and Cons of Fixed rate loans
When you take out a fixed rate loan, the interest rate is set for a certain period of time and does not fluctuate in relation to the interest rates of the financial markets.
If you are a homeowner who is conscious of your budget and you want certainty of what you’re repayments will be for a certain period of time then you may find that a fixed rate home loan is a possible solution for you.
A fixed rate home loan gives you the assurance that your interest rate on your home loan will not change during the fixed rate period regardless of any potential market fluctuations.
Depending on the fixed rate period that you have locked in, this could be as little as one year or as long as ten years.
Most borrowers tend to prefer having a three or five-year fixed rate term because it provides them with more flexibility to make adjustments in the event their lives change significantly within that timeframe.
If you are considering a fixed-rate loan, you should be aware that there may be certain restrictions associated with this type of loan that you will need to take into account before deciding if it is the best choice for you.
You may be limited to the amount you can pay back during the fixed rate period if you are thinking of paying off more than the minimum repayment on the loan during the fixed term.
If you are lucky enough to be able to pay off the loan before the end of the fixed rate period, or if your life situation changes and you are needing to sell the property or transition to a variable interest rate, you will probably be faced with large break fees.
Additionally, when it comes to a fixed rate loan you may not have the opportunity to use an offset account to lower the amount you owe.
Despite the fact that some lenders will enable an offset account with a fixed rate home loan, it is not a standard practice among lenders to offer this.
On the expiration of the fixed-rate term of a loan, it is essential to remember that it will usually revert to the lender’s current standard variable rate, and it is therefore important to factor this into your decision making process.
It is vital that you consult with an experienced mortgage broker before your fixed rate term expires, as the lender may not offer their most competitive rate when the loan switches to a variable rate.
Variable Rate Loans
Variable rate home loans typically have an interest rate that can be influenced by market changes and fluctuations in the current interest rates.
A variable rate loan usually comes with an interest rate that can change over time, it may increase or decrease depending on the market situation.
With a variable rate loan, you could potentially benefit from features such as an offset account, which could help you reduce the interest you pay, a redraw facility, and the option to make extra payments either regularly or with a one-time lump sum.
A variable rate loan may be an appropriate choice for you if you are looking to have more flexible choices, however, you must be mindful of your ability to pay off the loan should the rate of interest increase.
A Split Loan – The Best of Both Worlds
It is possible to split your loan into two parts, with one portion at a fixed rate and the other at a variable rate. You have the ability to split up your loan into two equal portions or alter the ratio so it is satisfactory to your needs.
If there are any questions you would like to ask or scenarios you would like to discuss, please get in touch today by booking a Free Consultation or by calling 02 9068 6644, I guarantee that you will not be presented with a sales pitch!