Fixed vs Variable Home Loans
If you're about to buy a house or you're looking to refinance you may be asking yourself, should I fix my home loan or not? Like most decisions, there are pros and cons for each option. Here are some things to think about to help you decide.
Pros and cons of fixed rate home loans
Fixed home loans have an interest rate that is fixed for a set period of time - often 1, 3 or 5 years. At the end of the fixed rate term, the loan will usually switch to the standard variable rate offered by the lender.
Here are some advantages of fixing your home loan:
- Makes budgeting easier - You know exactly what you're repayments will be, so you can plan ahead and set financial goals with confidence.
- Rate rises won't affect you - If interest rates rise above your fixed rate, you will be happy knowing you are paying less than the variable rate.
But there are some disadvantages with fixing your loan:
- Rate drops won't apply to you - You won't benefit from a drop in interest rates if your fixed rate is more than the variable rate.
- Limits on extra repayments - Additional loan repayments are often not allowed with fixed rate loans or repayments may be capped at a low amount or only permitted with a fee.
- Do you need to redraw? - A redraw facility may not be offered on a fixed rate loan.
- Break fees - Fixed rate loans may have a break fee if you change or pay off your loan within the fixed rate period.
This kind of loan may not be suitable if you are thinking about selling your home or want the freedom to switch home loans if you find a better deal.
At the end of the day you need to look at what your budget can absorb and what is best for your circumstances.