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.
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.
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 mortgage payments 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.
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.