With so much uncertainty surrounding the Reserve Bank of Australia’s (RBA) monthly decision on what to do with interest rates, or whether banks will increase rates for other reasons, it might be time to think about your loans and whether they are structured to suit your needs into the future.
One of the most obvious considerations for your home loan is whether a fixed or variable rate loan is best for you.
Fixed rate loans
Fixed rate loans are generally offered for terms of between one and five years, with the interest rate (and repayments) remaining the same over this period. They can be considered a predictable approach, because you can plan for set repayments.
Other benefits include:
- Peace of mind: You have peace of mind knowing your payments are going to be unchanged during the fixed rate period.
- Rising rates: May be a good option in a rising or uncertain market.
While fixed rate loans can provide certainty, they also have some disadvantages, including:
- Fees: A fee may apply if you break the fixed rate period early should you need to due to changed circumstances. These costs may be significant.
- Your interest rate won’t reduce: You would not be able to take advantage of a reduction in interest rates, should they fall.
Variable rate loans
Variable rate loans are subject to rate movements applied by the banks. If the RBA raises the official cash rate, variable rates set by the banks generally follow. However, there is no guarantee that your bank will follow the RBA’s lead, and rates often change without the RBA’s decision.
Some of the advantages of variable rate loans are:
- Features: borrowers may be offered additional loan features such as offset accounts and loan portability.
- Flexibility: borrowers may be able to make additional payments without penalty or be offered a redraw facility.
Like fixed rate loans, variable rate loans also have their drawbacks:
- Risk: if interest rates rise, so too will your repayments.
- Security: these loans provide no security for people who may have trouble affording the increased repayments associated with multiple interest rate rises.
Why not both? Talk to the team today!
Many lenders offer borrowers the best of both worlds, allowing borrowers to split their mortgages by having a portion financed by a variable rate loan, and the remainder by a fixed rate loan.
Changing your loan should be a decision made after careful consideration. Now is a great time to come and speak to one of our lending specialists who can ensure you have the finance that suits your lifestyle and circumstances. Your lending review only takes 30 mins, and could save you thousands!
Disclaimer:
This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial adviser before making any investment decisions.