You may have heard that interest rates are looking to increase in 2018. If this happens or not is speculation and know one really knows when, how often and how much interest rates may change. Having said that there is that old saying…
“What goes up, must come down”
and the same can be said for the reverse. That’s probably why I have a lot of client’s asking me recently if they should Fix their home loan or stay on a Variable rate. The only person who can answer that is you but certainly here are some things I share with my clients to help them decide.
What is the difference?
Fixed
A lot of people think Fixing your loan is about saving money however, that’s not generally the case. In fact fixing your home loan is about peace of mind and budgeting. For example if you Fix your home loan for 3 years, then you know, regardless what the market does for the next 3 years this is the exact amount you will need to be repaying back to the bank.
The downside to a fixed rate, it’s much less flexible. You can only repay a certain amount before fees are charged and if you do pay extra you are unable to have access to these funds until after the fixed period.
Variable
A Variable rate however will continue to go up and down as the market does (and sometimes out of cycle as we’ve seen in the past few years). A variable rate is far more flexible, allowing you to repay additional funds onto the loan at no charge and you can gain access to these funds at anytime. The majority of variable loans also have an offset account so you can save even more money in interest.
When it comes to budgeting however, you don’t have the certainty of knowing what your repayment will look like in 1, 2 or 3 years time as it may go up or down.
One thing I do talk about with my clients about their Home loan is the ability to split the loan into two and have the best of both worlds. Something like a 20/80 split, although you can choose any amount. An example would be;
Sam and Jessica have a home loan for $400 000.00. they are about to start a family and would like to lock in a rate so they know what their repayments would be whilst still having the flexibility to make additional repayments. They split their loan into two loans as follows;
Total loan amount $400 000.00
Variable loan $80 000.00 – current repayment $381.00 however as rates go up 1% this will increase to $429.00
Fixed loan $320 000.00 – set repayment for the next 3 years at $1507.00
With the new loans, Sam and Jessica know how much they have to repay and if rates go up 1% they know the smaller loan repayment amount is so small they can still manage. They also still have the ability to repay additional money to the variable loan and redraw it if they need to.
It’s important to consider what your long term plans are and what the unnegotiable features are you want in your loan before you decide to fix your loan. If you would like to know more about fixing your loan for you personally please contact me
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