For those finance newbies out there, a fixed rate home loan is simply a means of guaranteeing your mortgage payment over a set period by locking in an interest rate. With whispers of an increase soon, it may just be a good time to consider it!
Fixed rates are for an initial period, typically anything from a year up to 10 years. During the fixed rate period, your payment will remain the same, regardless of what variable mortgage interest rates do. Yet, once this fixed rate period has ended, your mortgage will move onto a variable rate, usually set by your bank.
While this seems like a dream come true, you’ll be paying over the odds if interest rates fall during the fixed rate period - though it’s very unlikely we will see them this low again.
Peard Finance mortgage expert, Paul Hamilton, says there are pros and cons for every home loan, and it is all about finding the right fit for your situation.
“A fixed rate loan is a good option for someone who wants certainty in their repayments. The down side is the lack of flexibility in the loan as it generally restricts extra repayments and can come with a penalty for paying out early.
“In saying this, there are some lenders who allow small amounts of extra repayments on their fixed rate loans,” says Paul.
Variable rates on the other hand are typically more forgiving.
“Variable rate loans generally allow for extra repayments into the loan and give the consumer more flexibility,” he said.
However, with the cash rate remaining at a low 1.5 per cent for the 13th
consecutive month, and the market providing some extremely competitive fixed rates, there seems to be a lot of consumers looking toward the option of a fixed rate loan.
“Industry figures over the past year have certainly seen an increase in people taking out a fixed rate on some or all of their loans”.
There is also the option of fixing only a portion of your home loan in comparison to the entire loan. This option has also been very popular as it gives the consumer the ability to pay off the variable portion of the loan without penalty, whilst providing some security with a portion of the loan on a fixed rate.
With uncertainty regarding the future of Australia’s cash rate, Paul says people who opted to fix one half of their loan may possibly see themselves in a better position.
“If interest rates go up the increase will apply to the variable portion, not the fixed. This style of loan has been very popular with a lot of consumers as it gives them piece of mind as well as a bit of flexibility.”
There are benefits to both fixed and variable home loan rates and as a consumer, it is important to weigh up the features to see which is most suitable for you and your individual needs.