As a home owner or investor, when choosing a home or investment loan you should consider more than just today’s interest rates and which lender to choose. You must decide between fixed or variable rate loans and choose the loan that’s right for you.
A variable interest rate loan is a loan in which the interest rate charged varies as market interest rates change. As a result, your payments will vary as well.
The main feature of variable rate loan is its flexibility. You are usually allowed to make unlimited additional repayments as well as redraws. Many variable rate loans also offer facilities such as offset account.
Fixed interest rate loans are loans in which the interest rate charged will remain fixed for the certain period of time, from 1 to 10 years, no matter what market interest rates do. This will result in your payments being the same over the entire term (as long as you choose principal and interest repayment). Shorter term fixed rates are usually lower than longer term ones.
Compared with variable rate loan, fixed rate loans are less flexible. There are limitations on additional repayments and redraws. Also if you want to terminate the fixed rate loans before the term expires, you are subject to lender’s break cost.
Generally speaking, if interest rates are relatively low, but are about to increase, then it will be better to lock in your loan at that fixed rate. Your interest rate on the loan will remain fixed, even if interest rates climb to higher levels.
On the other hand, if interest rates are on the decline, then it would be better to have a variable rate loan. As market interest rates fall, so will the interest rate on your loan, hence your repayments.
If you are on a predictable income and want to stick with the loan repayment in the near future, a fixed rate loan is a good choice for you, as your loan repayment will be locked in for the entire fixed rate loan term.
On the other hand, if you plan to sell your property or rebuild your home, the flexibility from variable rate loan may be more important for you.
Why not taking the benefit from both worlds by mixing variable rate and fixed rates? It can be a good choice as well.
Above discussion is simplistic, as which loan or combination of loans are right for you depends on your individual situation and requirement. Are interest rates going to rise soon? How much more repayment I can afford if rates do rise? How about for investment loan?
Ask our lending manager. With experience of structuring loan solutions that are right for individual borrowers, they will give you the right answers.