Interest rates may drop further – or they might stay stable. One thing that is for certain is that they will rise again at one point or another.
If you’re about to buy a house or you’re looking to refinance you may be asking yourself, should I fix my home loan or not? Especially with interest rates at an all time low.
Fixing your rate gives you confidence around budgeting. You can plan out what you can afford and have certainty of a fixed monthly expense for a set number of years (usually up to 5 years).
One thing people often overlook is that many banks limit the extra repayments allowed on a fixed loan and there can be significant costs to exit the loan early. If you are expecting to pay the loan down sooner or sell the property, make sure you discuss this with your bank or broker as a variable rate loan or fixing for a shorter period may be better suited to you.
Remember, coming out of a fixed rate can be a shock if rates have increased during that time. You should keep an eye on how interest rates are moving so that you can plan for any changes. Look at your household budget and if you need to, make allowances for rate changes so the impact is not so hard.
Choosing a variable rate can carry some risk. Whilst interest rates are low, variable rate holders enjoy the benefits of interest rate cuts. However, should rates rise, their home loan will also be hit with a rate increase.
A big draw-card for variable home loans is they are often available with offset accounts and redraw facilities. Variable also gives you the freedom to make extra payments or sell the property at any time without penalty.
Another option is to take a combination of fixed and variable. There are options to split your home loan so that say 70% is fixed and 30% is variable. This means you can benefit from rate cuts, but if they begin to increase, only 30% of your loan is affected.
The key questions to ask yourself are: What do you want to achieve? What are your short and long term plans for your asset? Do you want consistency in repayments to help budgeting? Or would you prefer to take advantage of the low interest rates of today?
You could consider choosing a variable rate in the short term – for a year or so – and watch the market. If rates are moving upwards, you can then change to fixed before they rise too much further.In contrast, if you decide to break a fixed term loan in order to switch to variable, penalties will usually apply.
It’s hard to predict what will happen with the cash rate, but with some extra guidance from your bank or broker, you can make a more educated decision.
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