Want me to tell you whether you should fix your rate?
Let’s start with the main differences between a fixed and variable interest rate.
Fixed Rate – the interest rate and therefore the repayments will not change during the contracted fixed rate period. This is usually 1 to 5 years but some lenders offer much longer. That means you have certainly during the period as to what you will be repaying. There are some down sides though.
You may be surprised to learn that most lenders provide a way around some of the downsides. It comes in the form of a split loan – more on that in a minute.
Variable Rate – The interest rate will vary, generally but not always in line with the Reserve Bank’s official interest rate. Your repayments can also increase if the interest rate increases. I say ‘can’ rather than ‘will’ because it does depend on your individual circumstances. Mostly though, you will be asked by your lender to increase your monthly repayments if the rate increases.
Of course, if the interest rate is reduced, you will enjoy the benefit where some one on a fixed rate won’t.
Note that a lender will not generally reduce your repayments if the rate reduces. It means that a larger portion of what you are paying goes toward paying off the loan rather than paying interest.
Split Loan – You are able to split your home loan into a Fixed Rate portion and a Variable Rate portion. You might choose to do this if you aren’t sure which way future interest rates might go and want an element of certainty with the opportunity to take some advantage if rates fall.
The major advantage, I believe, is being able to take advantage of a fixed rate for, say 80% of your loan, leaving 20% variable so that you can make extra repayments and redraw if necessary.
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