When applying for a home loan, there are a number of features that every home buyer should pay attention to because they can affect the size of their monthly mortgage repayment and the overall amount of the loan.
One of the things that you should pay attention to is the interest type. There are two types: fixed interest rate and variable interest rate. A variable rate means that the interest rate can increase or decrease at the discretion your lender, who will take into account a range of factors including the official cash rate which the Reserve Bank of Australia (RBA) sets every month.
A fixed interest rate is one where your interest rate is locked for a certain period of time, meaning your mortgage repayments will stay the same despite any changes in the official cash rate or your lender's funding costs. After the fixed rate term ends, your interest rate will then revert to variable rate.
In this article, let’s focus on the pros and cons of a fixed interest rate on your mortgage:
PROS of a fixed rate home loan
Mortgage repayment is predictable: You know exactly how much you’ll be paying every repayment for a set period of time. Usually, a fixed rate term will last from 1 to 5 years. This gives you certainty during the term.
You can maintain a low interest rate: Since your interest rate is fixed, your mortgage will not be affected if the Reserve Bank of Australia raises its official cash rate. This can also lower the total interest payable on your home loan.
It makes budgeting easier: Since you already know how much you’ll be paying every month, you can easily plan out your household budget.
CONS of a fixed rate home loan
There is less flexibility: Most lenders will not allow you to make any extra repayments to repay your mortgage faster. You may need to pay significant fees in order to make alterations to your home loan.
You can’t take advantage of a falling interest rate: It’s possible that the cash rate may decrease. If so you won’t be able to take advantage of the savings you can get from a lower interest rate.
There are break fees: If you want to end your fixed interest rate during the fixed-rate term in order to take advantage of lower interest rates or to make adjustments to your home loan, you will need to pay break fees which can be pricey.
When making a decision about whether or not to fix your home loan, you will need to consider your personal financial situation. You should also weigh up the pros and cons to help you understand if a fixed rate can work for you.
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