Fixed Interest Rate Home Loans
Fixed rate home loans along with variable rate home loans are the two broad home loan products offered by home loan lenders. So that you can make the best decision for you, it is important to understand how each of the home loan products work. This can be done by considering the advantages and disadvantages of different home loans available.
What are fixed rate home loans?
Fixed rate home loans have an interest rate that stays the same for a period of time, usually for between 1 and 5 years. At the end of the term, borrowers can opt to fix the interest rate for another specified period or change over to a variable interest rate home loan.
Is a fixed interest rate higher than a variable interest rate home loan?
Fixed home loan interest rates can be higher or lower than variable home loan rates based on future interest rate predictions If a fixed rate is lower than the variable rate it is normally an indication that lenders believe that interest rates will fall further in the future.
Generally there are 2 types of fixed interest rate home loan products. These are:
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Standard fixed interest rate home loan where the interest rate is established when the loan has been accepted. Once this has been agreed the interest rate is applied to the full loan amount and can not be changed during the fixed rate period.
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Split fixed rate home loan where the fixed interest rate is applied to a portion of loan for a specified period. In this case the balance is subject to the variable interest rate.
There are also variations on fixed rate home loans available to borrowers:
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Some lenders offer a ‘honeymoon period’ where they will provide a discounted interest rate (variable) for a period of time, and fixing the rest.
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Another variant is a capped home loan. These loans are semi fixed home loans where there is an agreed cap or ceiling that the interest rate can not rise above. In this case, the rate can fall, reducing interest and repayments.
Borrowers should note that there is generally two interest rates advertised on a home loan product. These are the nominal interest rate and the comparison rate. The comparison rate is usually higher and the interest rate to look out for because it includes the total cost of the home loan, including interest on the loan as well as any associated fees and charges.
Thanks to the National Credit Code, lenders are legally obligated to market the comparison rate and advise borrowers. This allows any potential borrowers to compare actual costs accurately.
What Are The Advantages and Disadvantages of Fixed Rate Home Loans?
Fixed rate home loans as well as variable rate home loans have advantages as well as disadvantages. There are a number of circumstances that the borrower should consider when deciding which home loan product is the right fit. Some of the things you need to consider when deciding which is the best home loan for you includes:
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Your personal financial situation and what structure suits your income, lifestyle and other financial commitments.
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Market changes to interest rates. If interest rates go down you will be paying more than a variable interest rate home loan for the same amount. If they go up you will be paying more.
Fixed Interest Rate Home Loan Advantages
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Unlike with a variable rate home loan, repayments are fixed. This means that if interest rates go up, you will be paying less than a borrower on a variable rate for the same amount.
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Fixed rate home loans make it easier to budget for future expenses as your repayments will not change for the duration of the fixed term.
Fixed Interest Rate Home Loan Advantages
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If interest rates go down, you will be paying more than being on a variable rate for the same amount.
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Fixed interest rate home loans generally have higher fees than a variable loan.
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If you would like to change to a variable rate before the fixed interest rate period is over, you may be liable to pay a penalty or break fee.
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Most fixed rate loans limit your power to make additional payments.
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Most fixed rate loans don’t have additional features such as a redraw facility.
Which loan is better, fixed or variable?
There is no crystal ball to answer this. There are many things to consider when deciding which home loan is best.
Much of being in a better financial position when it comes to home loans depends on what happens with interest rates.
If you are undecided there is always the option of fixing part of the loan, while having a variable interest rate on the other part of the home loan to provide you with some flexibility.
Fixed home loans are also a good option for borrowers that need to know their exact home loan repayments so that they can ensure their financial certainty.
Are fixed home loan interest rates going to rise?
As home loan interest rates have been at record lows for a number of years in Australia, it is predicted by financial experts that interest rates will ultimately rise as economic conditions inevitably change.
What's the Yellow Line?
Buying a home is likely to be the largest financial decision you will make. There are a vast range of products and banks are extremely competitive. It is best to seek professional financial advise to ensure you obtain the most appropriate home loan product for your needs.
Yellow loans has a vast range of lenders with a range of products to achieve the best results on obtaining the best home loan deal for you. You can contact us here and we can get your future looking bright.