Do you get a Fixed or Variable Home Loan in uncertain times
Thursday November 29, 2007
Houses are continually being bought no matter what the economic times are doing to the interest rate of the day. But how do we know what is the best way to go about getting a home loan, should we have one with a fixed rate so we know what we are paying for the next five years or should we get a variable rate which can change throughout the life of our loan?
Firstly, we need to understand what the two different types of home loans actually mean to our hip pocket when we are making our home loan repayments.
A fixed interest home loan will result in the borrower agreeing to repay x amount at an agreed interest rate.
The advantages of this revolve around knowing what you're going to be repaying regardless of whether the interest rate rises any more.
Conversely, if the interest rate drops then you will still be obligated to pay the higher rate that you have previously agreed to pay.
A variable interest rate home loan will see you pay whatever the home loan interest rate is at the time. This rate can change without notice and usually follows on the back of the Reserve Bank of Australia lifting official interest rates, which are currently at $6.75%.
Unlike the fixed interest rate home loan, if a variable home loan rate drops, then you will reap the benefit of the reduced interest rate.
However, if the interest rate escalates, as it did during the 1990s to 17-18% range, then you are obligated to pay your home loan repayments at the higher rate.
- Which interest rate is best for a fixed or variable home loans?
If you take out a fixed interest home loan today, you will find that the interest rate is slightly higher than the current variable home loan interest rate being offered by the same financial institution.
With interest rates expected to rise early next year, locking in your home loan now at a higher rate may be a money saving exercise in the long run, especially if the reserve bank lifts official interest rates more often throughout the course of the next year or two, which could well be the case in an attempt to keep on top of rising inflation.
You should seek professional assistance when contemplating a long-term commitment such as a home loan. Which interest rate type of home loan you apply for is ultimately your choice and having a general idea of what interest rates may or may not do in the foreseeable future can be a money saver.
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