The interest rate plays a huge role in determining the size of your regular repayments and the total mortgage amount you will repay over the life of the loan so it rightly receives a lot of attention.
Financial institutions such as loans.com.au offer an option for borrowers to choose what type of interest rate they want to apply to their mortgage.
Understanding fixed rate mortgages
As the name suggests, a fixed rate mortgage means that your interest rate will remain unchanged throughout the fixed rate term. One of the benefits of a fixed rate home loan is you pay the same amount every repayment whether it’s weekly, fortnightly, or monthly.
Bear in mind that the fixed rate period will expire after an agreed period of between one and five years. Once the fixed-rate term ends, your mortgage will go back to being variable rate so the rate can fluctuate over the life of your loan.
Advantages and disadvantages of fixed interest rates
The main reason that people opt for a fixed rate mortgage is certainty of repayments. As mentioned, getting your mortgage fixed means you know exactly how much you will need to pay every month.
This makes budgeting a lot easier, letting you plan your finances ahead of time and helping you maintain your standard of living. It is particularly valuable if you don't have enough room in your budget to handle a spike in the interest rate.
While it’s an advantage to be protected from a mortgage rate increase, this can also be a disadvantage. If the interest rate goes down you will miss out on any savings. Even small changes in interest rate can greatly impact your repayment amount.
Another disadvantage of a fixed mortgage is the restricted features. There will be fees charged if you move to refinance your loan to a lower rate, make additional repayments, or add a redraw offset facility. The fees can also be very expensive if you move to end your fixed rate term early.
Deciding whether you should fix your mortgage is ultimately a personal decision which will depend upon your financial situation and goal.