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Should I Have a Fixed Rate, Variable Rate or Split Rate?

February 27, 2017
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3 mins


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Should I Have a Fixed Rate

Should I have a fixed rate home loan?

When you take out a mortgage or home loan you can choose to have an interest rate that is fixed, variable or split which is a combination of the two. There is no right or wrong option – it really depends on your individual circumstances.

Let’s take a closer look at each option:

Fixed rate home loans

With a fixed rate home loan the interest rate on your mortgage doesn’t change for an agreed period (usually 1-5 years) no matter what happens to official interest rates. Typically a borrower would like to fix their home loan if they are a first home buyer looking to have a fixed repayment amount for a period of time for certainty around budgeting or fixed interest rates are more competitive than their variable counterparts.

Variable rate home loans

With the variable rate home loan, the interest rate on your mortgage can change. If official interest rates go down, your interest rates will go down too. However, this also means that if the Reserve Bank increases interest rates your home loan rate will most likely rise as well.

Split rate home loans

A split rate mortgage combines elements of the fixed rate and variable options. For example, you can have 80% of your home loan at a fixed rate, while the remaining 20% is at an interest rate that varies with the market. Typically borrowers would opt for a fix rate loan if they are uncertain if interest rates are expected to increase or decrease so they hedge their bets. Alternatively, they would like to fix their home loan but keep a small portion variable to take advantage of an offset account linked to their variable loan split.

Which home loan interest rate is the best option?

Because it is absolutely predictable, the fixed rate home loan can give you greater confidence that you can meet your mortgage repayments regardless of changing economic conditions. The disadvantage is that it generally lacks flexibility.

If official interest rates, the variable rate home loan can save you money, but you also need to consider the risk that your loan repayments could rise in the future. If you are contemplating a low introductory or honeymoon rate for an initial period you will save initially, but you must find out what the interest rate will be when the ‘honeymoon’ is over. The lowest initial rate doesn’t always mean the better deal.

How long should I fix my rate for?

The length of time you should fix for really depends on what your goals are and what is happening in your life. Rates can be fixed for a range of different terms including one, two, three, four and five years.

We often ask clients what they plan to be doing in two to five years. When you select the length of time to fix in for, you need to consider your long-term goals. The problem with this is we aren’t very good at predicting the future, and what we plan is not always our reality. A great job offer may come along requiring you to relocate, or you may receive an inheritance and want to pay off the loan – there can be any number of things that crop up unexpectedly and require your plans to change.

Can a mortgage broker give me advice on what best suits my individual circumstances?

The split rate home loan gives you some of the benefits of both fixed rate and variable rate loans. You won’t save as much as a full variable rate loan if interest rates fall, but you also won’t be exposed if interest rates rise.

Talk to the friendly mortgage broker team at Inovayt today if you’re wondering should I have a fixed rate loan or to see what type of loan will work best for your situation!

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