When interest rates are low, many people think it wise to fix their home loans, but without looking at the pros and cons of such a move, this can be a very poor decision with long term consequences.
So what are the pros and cons of fixing your home loan?
Why it might be the right decision to fix your home loan
There are two clear advantages to fixing your home loan for the usual period of 1, 3 or 5 years. The first benefit is that you know exactly how much your repayments will be every month for the life of the loan. This means that you can budget properly and if you are on a low income or a limited budget, being able to predict your costs can be enormously helpful in managing your family’s finances.
The second reason is that you are not at the whim of the RBA and the banks. If they raise their rates, it doesn’t matter how high they rise, your repayments will not change. Obviously this helps with your budget, but it can also give you a sense of peace knowing that one of your largest financial commitments will remain stable for a set period of time.
Why it might be the wrong decision to fix your home loan
The problem with fixing your home loan is that you cannot take advantage of rate decreases. If the rates decrease, your repayments stay the same and are fixed at the higher interest rate. If you fix your loan at a low interest rate, this is not too uncomfortable, but if you fix at a fairly high rate and see the rates drop dramatically, this can be extremely stressful.
Another problem with a fixed loan is that you cannot make extra repayments as you can with a variable loan. You might be able to make an additional lump sum payment each year, but these are limited.
The last problem with fixed loans is that if you break the loan by either selling your home or paying off your loan before the end of the loan period, you might have to pay a ‘break fee’ which can cost you thousands of dollars, the earlier you break the loan.
In general, if you need to limit your repayments and have tight control over your budget, then a fixed loan might be best for you – if the rates are low. If they are already high, then wait until the rates drop and then maybe fix your loan. If you want to repay your mortgage early and are not too worried about interest rates, then the variable home loan might be best for your situation.
So if you are ready for a home loan, check out Newcastle Permanent home loans and they will help you make the right decision for your family.