While it offers interest rate security and predictable payments, does a fixed rate home loan fit your budget and lifestyle?
What is a fixed rate home loan?
A fixed rate home loan is a type of mortgage product featuring a locked interest rate for a set period of time – usually from one to five years, according to MoneySmart. Unlike a variable or introductory rate loan, the interest rate and repayments on fixed rate loans don't fluctuate with the market, making them an attractive option to many home buyers.
What are the advantages of a fixed rate loan?
The ability to lock in a favourable interest rate plus knowing exactly how much you'll be paying back every month are the main advantages of choosing a fixed home loan.
For example, let's say you're comparing a 30-year, $500,000 loan at a fixed rate of 4.5% against a 4% variable rate loan. While the payment on the variable rate loan would be lower initially ($2,533 versus $2,387), even a 2% increase would cause your monthly payment to jump by an extra $611 every month.
For those with less flexibility in their monthly budget, a fixed rate home loan can offer greater control and peace of mind.
What are the disadvantages of a fixed rate loan?
Although fixed home loans have better payment predictability, there are a couple of trade-offs:
Less payment flexibility. Unlike variable rate loans, most fixed rate loans won't allow you make extra repayments or exit the loan early (for example, if you sell your house) without incurring a penalty.
You're locked in. With a fixed rate loan, you won't benefit from falling interest rates.
Who is best suited to a fixed rate loan?
Fixed rate loans can be a good fit for:
first home buyers
families juggling multiple expenses
investors who require predictable financing costs.
What are split home loans?
If you're on the fence about a fixed or variable rate loan, a split rate home loan may give you the best of both worlds by allowing you to split your mortgage into a fixed rate portion and a variable rate portion. With a split home loan, your payment won't fluctuate as dramatically when interest rates rise or fall.
One advantage split home loans have over fixed loans is that you can make extra repayments on the variable portion, which can help reduce the overall cost of your mortgage. However, the fixed portion will still be subject to early exit fees.
When choosing a home loan, it's important to consider your needs, earning potential and long-term financial goals. Everyone's situation is different, so be sure to consult with your mortgage broker to determine if a fixed rate home loan is the right choice for you.
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