Understanding the implications is key!
Since your interest rate will determine the cost of your loan; it’s important to carefully consider your options. If it’s at this point your starting to panic, there’s no need to. Rest assured that your broker (that’s me) will help you understand all your options and how they will affect you in the real world.
Short of having a crystal ball to predict the future interest rates, it’s crucial that you consider your own financial goals and commitments as part of the decision process. You want to be making an informed decision that your comfortable with.
Variable Interest Rates: Your interest rate can change, and if it does so too does your repayment. Being at the mercy of market forces means there is always a level of uncertainty.
But surely there is some benefit? ……. Flexibility!
- You can make unlimited additional repayments (pay off loan early)
- Offset Accounts
- Redraw facility
- Less costly to change lenders when you might need to refinance elsewhere
Fixed Interest Rates: The interest rate is fixed for a specified time (usually between 1-5 years). Repayments will remain constant until the fixed period ends, at which point you will usually revert back to the standard variable rate. Please note that there are limitations to you loan account under a fixed rate as follows:
- No offset account (in most cases)
- Limited in the amount you can make as additional repayments (usually $10-15K per fixed rate period)
- You may incur ‘break’ costs if you pay out the loan early or re-finance elsewhere
Whilst there is no guaranteed way of predicting rates, you need to weigh up your options and see how it fits within your circumstances. Below I’ve demonstrated a few decision making processes to highlight this:
- First time investor that is very risk averse, and likes to budget all their life expenses: Fixed interest rates would allow certainty and peace of mind for this person.
- A couple that purchases a property with the view to renovate and then sell in a short time frame: Variable interest rates so that they can easily pay out loan once they sell without having to incur expensive break costs.
- Couple having a child in the next year or so: Fixing their interest rate would allow them to ensure they can cover all necessary mortgage costs + the impending costs associated with having a newborn.
- A seasoned investor that follows the markets closely and sees the trend of downward pressure on interest rates: they would be likely to keep the rate variable as they see opportunity for lower rates on the horizon
Seek the right advice!
As with all things home loan related, you shouldn’t be looking at what your neighbours and friends are doing; instead you want to get the right advice from informed professionals that will help you look at your own set of unique circumstances.
If you have any further questions on any of the above information, please don’t hesitate to get in contact with me.