When you apply for a home loan or refinance your existing loan, you’ll need to choose whether you want a fixed vs a variable interest rate. Your interest rate is one of the main factors that will determine the cost of your loan, so it’s an important decision.
It’s not just about the rate percentage or your repayments – there are other differences between fixed and variable rate home loans that you’ll need to take into consideration. It’s always a good idea to seek advice from a qualified professional as the right loan for you will depend on your financial circumstances and goals. To get you started, here’s some things to think about when deciding what repayment type is right for you.
Fixed rate home loans
With a fixed rate home loan, your interest rate is locked or fixed into place for a set period of time. Generally fixed rate periods go for one to five years then automatically switch to a variable rate loan, unless you choose to fix your home loan for another term or refinance to another fixed rate home loan with another lender.
With a fixed rate loan you know exactly how much your repayments will be. This can be helpful for budgeting and planning, and for many people it provides a sense of security that they won’t be vulnerable to interest rate increases during their fixed rate term.
On the other hand, fixed rate home loans are less flexible and have fewer features than variable rate home loans. If you’re looking for an offset account, redraw facility or other features, you may want to weigh up how important these are before you opt for a fixed rate home loan. If you pay out your fixed rate loan early, in most cases you will need to pay a break cost.
Another important factor to be aware of is that if the variable rate drops below the rate on your fixed loan, you will miss out on the benefits of reduced payments. Of course this means the opposite is true – if interest rates go up, your repayments will also stay the same.
Variable rate home loans
With a variable rate home loan, your interest rate will fluctuate depending on a range of different factors. While this means you won’t always know what your repayments will be, you will get a greater level of flexibility and access to more features. Some of these features, like an offset account or redraw facility, can potentially help you save interest costs over the life of your loan while still providing you with available funds in case of emergency.
With a variable rate loan you benefit if interest rates fall, but if they go up, you may end up paying more. This can make planning for the future and budgeting trickier as it’s not always easy to predict what interest rates are going to do.
What should you do if you’re coming to the end of your fixed rate period?
If your fixed rate home loan is coming to an end, you’ll need to make a decision. You can choose to fix your loan for another period of time, move to a variable rate home loan or refinance to a different loan altogether. It’s a good idea to consider your options ahead of time and get professional advice so you can be sure you’re making the right decision for your financial circumstances and goals.
Is your fixed rate home loan term due to end soon? Speak to Bluestone to explore your options when it comes to fixed vs. variable interest rate and find a solution that works for you.