Is fixed interest rates better?

Many people are often confused about whether they should have a fixed or variable interest rate for their home loan.

And this is really no easy answer. It depends on a number of different factors including your individual situation, and there are obviously risks, pros, and cons for each option.

And that’s where speaking to the right home loan mortgage experts always helps.

Here is what we found out:

Considering variable interest rates?

Variable rates are about flexibility. With a variable interest rate, your home loan repayments will reduce when interest rates go down.

Alternatively, you may be able to keep your monthly repayments the same, helping you pay off your loan sooner, and saving money over the life of the loan.

The flip side of a variable rate is that if interest rates increase, so do your home loan repayments. So ask yourself – are you prepared if interest rates increase by 0.5%, 1%, or 2%? Could you still comfortably make your repayments based on your income?

Considering fixing your interest rate?

On the other hand, a fixed rate gives you one locked-in interest rate for an agreed loan term. This term can be from one year up to five years. You know the interest rate will not change and neither will the repayment amount during the fixed rate term.

This can make budgeting much easier, as you know exactly how much you must pay each month, irrespective of interest rate movements.

However, when interest rates drop, your repayment will remain the same. So if variable rates fall below the interest rate at which you’ve fixed your loan, your repayments would be higher than they would be if you had a variable rate loan.

Another restriction on fixed-rate loans is that you generally cannot make additional repayments to your home loan and you can only repay a set amount.

You could also incur a large fee if you decide to switch to a variable rate option during the fixed term period.

Like to sit on the fence? How about a fixed and variable rate split?

Both fixed and variable-rate home loans have benefits and risks; so another option is to take advantage of those benefits by splitting your loan, which means electing to have part of your loan fixed and part of it with a variable interest rate.

This way you can reap the benefits if variable interest rates reduce, while at the same time maintaining the security of a fixed rate for a good portion of your loan.

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