Fixed Rate Home Loans

Fixed home loans have an interest rate that is fixed for a set period of time, usually 1 to 5 years. At the end of the fixed rate term, you can typically choose to switch to a variable rate or fix the loan for another few years.

Pros

  • Makes budgeting easier – You know exactly what your repayments will be, so you can plan ahead and set financial goals with confidence.
  • Rate rises won’t affect you – If interest rates rise above your fixed rate, you will be happy knowing you are paying less than the variable rate.

Cons

  • Rate drops won’t apply to you – You won’t benefit from a drop in interest rates if your fixed rate is more than the variable rate.
  • Limits on extra repayments – Additional loan repayments are often not allowed with fixed rate loans or repayments may be capped at a low amount or only permitted with a fee.
  • Unable to redraw.
  • Break fees – you may incur a fee if you change or pay off your loan within the fixed rate period.

If you are thinking about selling your home within the next few years or if you want the freedom to switch home loans if you find a better deal, a fixed rate home loan may not be suitable for you.

Variable Rate Home Loans

Variable rate home loans have an interest rate that varies throughout the term of the loan, in accordance with prevailing economic conditions. This means the interest rate can rise or fall over the term of your loan and your repayments will vary as the rate changes.

Pros

  • You can make extra repayments – Extra repayments are allowed at no extra cost, which can save you interest and help you pay off your loan sooner.
  • More features – Variable loans often have attractive features such as unlimited redraws on any additional repayments or the ability to save on interest by setting up an offset account.
  • Easier to switch loans – It is usually easier and cheaper to switch loans if you find a better deal elsewhere.
  • Smaller repayments – If interest rates drop, repayments also decrease.

Cons

  • Makes budgeting harder – It can be difficult to budget with certainty as loan repayments can increase when interest rates change.
  • Mortgage stress – If you aren’t prepared for a rate rise you may have trouble keeping up with repayments.
  • Larger repayments – If interest rates rise, repayments also increase.

Split/Combination Home Loans

Split/Combination Loans allow borrowers to take up part of their loan at a variable rate and part at a fixed rate.

A split loan allows you to manage some of the risks of interest rate rises while still providing repayment flexibility.

There’s generally no limit to the way you can split the loan, so you can allocate the funds 50/50 or 20/80 – the decision is up to you.

Whatever loan you decide to take out, it needs to work best for you. That means the loan product should have the features, flexibility and fees that are the most appropriate for your needs.

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