Choosing a home loan

With so much uncertainty surrounding the Reserve Bank’s monthly decision on what to do with interest rates, it is timely to think about your loans and whether they are structured to suit your needs into the future.

One of the most obvious considerations for your home loan is whether a fixed or variable rate loan is best for you.

Fixed rate loans

Fixed rate loans are generally offered for terms of between one and five years, with the interest rate (and repayments) remaining the same over this period. They’re often considered desirable at times when interest rates are likely to rise because you can plan for set repayments. Other benefits include:

• Cost: these loans can be more cost-effective in times of rising interest rates - provided the fixed rate is below the variable rate.

• Security: some security is provided for borrowers who are susceptible to interest rate and economic variability (e.g. those on fixed incomes or a tight budget).

While fixed rate loans can provide certainty, they also have some disadvantages, including:

• Inflexibility: these loans tend to be less flexible than variable rate loans, and can include penalties for early payout or making additional repayments.

• Timing: it’s difficult to time interest rate moves, with the end result being a greater overall interest cost if you fix your rate at the “wrong” time.

Variable rate loans

Variable rate loans are subject to rate movements applied by the banks. If the RBA raises the official cash rate, variable rates set by the banks generally follow, and sometimes vice versa. However, there is no guarantee that your bank will follow the RBA’s lead.

The main advantages of variable rate loans are:

• Features: borrowers may be offered additional loan features such as offset accounts and loan portability.

• Flexibility: borrowers may be able to make additional payments without penalty or be offered a redraw facility.

Like fixed rate loans, variable rate loans also have their drawbacks:

• Risk: if interest rates rise, so too will your repayments.

• Security: these loans provide no security for people who may have trouble affording the increased repayments associated with multiple interest rate rises.

Many lenders offer borrowers the best of both worlds. That is, allowing borrowers to split their mortgages by having a portion of their borrowings financed by a variable rate loan, and the remainder by a fixed rate loan.

Aside from taking out a mortgage in the first place, changing your loan should be a decision made after careful consideration.

Article originally appeared at

Any advice given is of a general nature only and does not take into consideration your personal circumstances. Please consider the appropriateness of the advice before acting.

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