The kind of home loan you get will influence the size of your mortgage repayments each month. Even a small difference in interest rate can make a big difference to how much you need to repay and to the total cost of your home loan over time.
For this reason, many people choose a fixed rate home loan where the interest rate is locked for an agreed period of time. This compares to the more common variable rate loan where the rate can fluctuate at the discretion of the lender. No one can really predict interest rate movements, so a fixed rate home loan can be a good choice if you don’t have enough room in your budget to pay for any future interest rate rises.
On the downside, it is possible that the variable rate of your lender will go down. If you are on a fixed rate, you will not be able to benefit from rate cut. If you want to end the fixed rate agreement early so you can get the lower rate, you may be required to pay a break fee amounting to thousands of dollars. Choosing a fixed rate will also prevent you making extra repayments without incurring additional charges. For these reasons, it’s important to speak with your lender before you decide to fix your home loan.
Trying to predict the interest rate market, - like the share market - is virtually impossible, even for experts. For this reason, it is not a great idea to try and save money in the long term by moving in and out of a fixed rate. Instead, the decision to fix should be made with reference to your personal finances and preferences. Ask yourself if you could afford to pay your mortgage if interest rates went up. If not, a fixed rate mortgage may be right for you. Even if you could struggle on with a higher rate, are you lying awake at night worrying about it? If so, a fixed rate might buy you some much needed peace of mind.
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Tags: fixed rate home loan | home loan
If you're trying to decide whether a fixed rate mortgage is your borrowing match, read the advantages and disadvantages of a fixed interest rate here.
If you have a variable rate home loan, you can still fix for a period when you want to. We discuss how to decide if fixing is a good idea.