The very backbone of a home loan is the interest rate. It ends up making all the difference in the end. It is therefore important to make sure that you understand what type of rates are available and which one suits your circumstances best.
We’ve all heard the terms fixed term interest and variable interest, what are they and what implications do they hold for you? Explaining the terms is self-explanatory, fixed term interest remains constant while variable interest tends to fluctuate according to the market.
Generally speaking plummeting cash rates indicated by the Reserve Bank combined with a strong global economy both play an instrumental role in determining fluctuations in interest rates.
Chances are most homeowners will at some stage ask themselves whether or not to fix their mortgage interest. Many people tend to opt for variable interest rate as this option opens the door to greater flexibility on repayments. With a variable interest rate when market interest rates go down, repayments get a lot easier for the borrower enabling them to save more.
Fixed rate mortgages on the other hand tend to work best for those that are hyper sensitive with their budgeting, dislike uncertainty and prefer to adhere to a standard repayment. With a fixed interest rate, the borrower typically sets aside a designated amount of money each month, without having to worry about constant fluctuations in interest rate.
The question of which type of interest rate is better cannot be answered on binary terms. It all depends on the preferences and work ethic of the borrower in question. It is up to you as the borrower to decide whether you want a fixed rate and avoid uncertainty or you want a variable rate and leave the option open to cash in on the benefits when market rates drop nation wide.
The good news is that most lenders will normally give you the freedom to choose if you’d like to extend fixing the rate or revert back to a variable rate. Many borrowers do tend to lean towards securing a fixed rate home loan rather than a variable one as demonstrated by various Government reports and academic research.
If you are really struggling to decide which one suits your circumstances the best, an interesting option is to split your mortgage so that you have both fixed and variable interest rates on different segments of the same loan – a case of getting the best of both worlds, really. However this is an option we strongly recommend you discuss with your financial adviser before locking in a final decision!
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