Fixed Rate Home Loan vs. Variable Rate Home Loan
Home loans generally have either a fixed or variable interest rate, or a split rate - a mixture of both. A fixed rate home loan is taken out for a set period with a set interest rate; when this period ends you can fix the rate again, or switch to a variable interest rate which fluctuates with the market.
Variable and fixed rate loans are more or less appropriate in different financial environments, and for different types of lender.
Fixed Rate Home Loans
Fixed rate home loans have traditionally been associated with rigid conditions, but with flexible new products available, and interest rates relatively low, fixed rate loans are currently quite popular in Australia (though not as popular as standard variable rate loans). The majority of fixed rate home loans allow extra repayments and include redraw facilities.
A fixed rate home loan can be good if you want to carefully budget your repayment - knowing exactly how much you need to repay means you can plan accordingly and gives you a degree of certainty and security.
However, some fixed rate loans still charge you for making early repayments, which means that if your financial situation becomes more positive you will often have to either pay a fee, or keep the loan for the original term and pay the full interest amount.
If choosing a fixed rate loan, you also need to consider fairly carefully the term of the loan â€“ usually between one and five years, but sometimes up to ten. The most popular fixed-rate loan term is three years - which seems to allow borrowers a sense of security with a certain degree of flexibility, but the choice of loan term needs to suit your specific situation.
Variable Rate Home Loans
Variable rate home loans usually provide options and flexibility, but they can also be risky in a rising interest rate market if youâ€™ve overcapitalised on your loan. The important thing to do when taking out a variable rate loan is to plan and budget for hikes in interest rates, and make sure that youâ€™re able to meet your repayment obligations should rates rise.
Variable rate loans can include a range of extra features, and some loan products have low introductory, or â€śhoneymoonâ€ť rates for an initial period before reverting to the standard rate.
Do Experts Reccomend Fixed Rate or Variable Rate Home Loans?
A number of experts suggest that fixed loans are a better option if there is an expectation of interest rate rises in the medium to long term. However, they also warn that the benefit gained may not be enough to counter the fees you could pay to switch from a variable to a fixed rate loan.
As with any home loan information, the key is to examine your own financial situation, and only consider a change if the fees to make the change are outweighed by savings benefits.
Some experts point out that fixed rates rarely fall below the standard variable rate for a long period, and when they do it is usually a good idea to fix at least a part of your loan. Remember that you donâ€™t have to fix all of your home loan, but you can split the loan between fixed and variable rates with a split rate loan.
Split Rate Home Loans: Get Fixed & Variable!
A split rate loan allows you to split your loan amount between fixed interest and variable interest rates. This means that regardless of the economic situation your loan will be partially suited to it. However, it will also mean that you will be unlikely to receive the full benefits of a choice one way or the other.
Such a choice may suit your particular situation if you need some security, but also want the chance to pay off some of your loan ahead of time.
Which Home Loan Is Right For You?
In the end your choice of a loan should be determined by your situation and your own financial priorities. It is difficult even for experts to make predictions about which direction interest rates will go in the long term â€“ your choice needs to be made with your own financial goals in mind, and take account of your income stream and need for security or flexibility.
How To Predict A Rate Change:
What To Look Out For When Choosing Between Fixed Or Variable.
Although it is impossible to accurately predict where interest rates will go, there are still some general ideas that can help you decide to choose a fixed rate home loan or a variable rate home loan.
There are a range of factors which influence interest rates in Australia. The following are some of the main factors, these can be looked at to try and make predictions about whether the interest rate may change.
Inflation is often talked about in the news when interest rates are being discussed. This is because it is one of the most important influencers of interest rates, the inflation rate is the rate of increase in the prices of goods an services.
For example if there is a reduction in the amount of goods and services you can buy for a dollar, then inflation is increasing. The main aim of the Reserve Bank of Australia is to maintain this inflation rate at between 2-3%. It does this by increasing or decreasing interest rates.
If inflation is increasing too fast, then interest rates will be increased to discourage consumer spending, thus slowing the inflation. On the other side if inflation is not increasing rapidly enough, then the Reserve Bank will decrease interest rates, which would encourage consumer spending, thus increasing the rate of inflation.
The Consumer price index, commonly referred to as CPI is another indicator to look at when trying to choose between variable rate home loans or fixed rate home loans. The CPI can be considered as an indicator of inflation.
CPI is calculated by measuring the change in prices of a fixed basket of average household goods and services, such as bread and milk. If the monthly price change is high, the CPI will also be high. If the CPI rises to quickly, this usually means inflation will be high and the RBA may raise interest rates.
The Australian Dollar can also be an indicator of future interest rate rises or falls. Although there are a lot of variables and theories behind this assumption, generally if the Australian Dollar is higher (in comparison to the US dollar), then interest rates will more likely fall, and vice versa, when the Australian Dollar falls, interest rates will likely rise.
Although if this all seems like too much work, you can just rely on comments from the Reserve Bank of Australia, or look at the general trend in interest rates in the marketplace.
Of course the interest rate isn't the only deciding factor when applying for a fixed rate home loan or variable rate home loan, there are also fees and other attributes to consider, such as customer service, flexibility, etc. Overall choosing a loan is a major decision and all elements of the purchase decision should be thoroughly analysed and thought through.