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The “experts” will have you believe that deciding between a variable and fixed interest rate for your home loan is, in its simplest element, a matter of whether you believe interest rates will rise or fall. If you believe interest rates will rise, you choose to fix. If you believe interest rates will fall, you choose variable.
The problem with this line of thinking is the unpredictable nature of interest rates. I don’t know of any finance or economics “guru” that will give a 100%, ironclad guarantee on the movement of rates.
In my experience the majority of home owners who choose to fix rates do so for payment stability or a discounted rate. Payments will remain the same throughout the entire fixed period so you know the weekly, fortnightly or monthly commitment you face.
Fixed Rates are usually available from 6 months to 5 years, depending on the lender.
6 or 12 month fixed rates are usually “honeymoon” rates at substantially below the standard variable. It is important to be aware that some of these loans will revert to a higher than usual rate after the honeymoon period.
Fixed rate loans can also have limited flexibility and early repayment penalties.
The repayments on a variable rate loan will go up or down with fluctuating interest rates. A lenders rate movement usually mirrors the Reserve Bank.
Most variable loans offer a range of features including unlimited extra payments, redraw facilities, repayment holidays and an ability to pay the loan in full with no extra penalties. If you were planning to sell your home in two years time this would be a benefit of a variable loan that would be compelling over a fixed rate.
Extra features on a variable loan can attract fees and are often seen in lenders “professional packages” as opposed to “basic loans”.
When comparing loans it is important to compare loans with similar features. Instead of looking first at rates and then features it may be more advisable to look at the type of loan that best suits your circumstance and then consider rates. This avoids being stuck with a loan you can’t get out of or paying for features you don’t need.
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