Fixed Verses Variable
No one size fits all when it comes to the wide range of home loans that are available. One of the major choices that you may need to consider is between fixed and variable rate interest products.
Certainly a good understanding of your financial position and goals will help you make the right choice. Over the different stages of the life of your mortgage you may find one or more of the below options appropriate, influencing your choice of product.
Fixed rate products are for a set term, usually one to five years, although some lenders offer up to ten-year terms. The fixed rate generally reverts to a variable rate at the end of the fixed term or, depending on the terms of the loan, you may have scope to renegotiate a further fixed term at that point.
Fixed rate loan products provide certainty in your monthly payments, and in a time of rising variable interest rates can provide peace of mind. On the other hand if interest rates go down, you could end up in a situation where your fixed rate is higher than the variable rate.
They generally have fewer features than variable rate loan products - but every product is different and must be considered in its merits. Fixed rates can also penalise early payout or additional repayments.
According to CANNEX, fixed three-year rates on a $250,00 mortgage start at a comparison rate of approximately 7.94% (including fees) but may vary significantly,so it is worth looking at different lenders' products.
Variable rate products are more suited to a borrower who is prepared for rises and falls in interest rates. Many variable rate products also offer flexibility in replaying the loan (i.e. they don't penalise the borrower for repaying the loan early).
And of course, the faster you are able to pay off your loan the cheaper it will be.
"Knowing your financial position and goals will help you make the right choice."
Variable loans can also offer features such as redraw, offset, portability and split loan facilities.
Split rate loans can offer a combination of the two options where one portion of the loan is fixed and the other is at a variable rate.
You will have certainty on repayments for the fixed portion while retaining flexibility on the rest.
You are normally able to make extra repayments, or or pay off the portion of the variable, without incurring penalties.
Of course all loan products will differ greatly from lender to lender. You should read the terms of any loan agreement carefully, and obtain independent advice from an appropriately qualified professional before entering such an agreement.
Article Source: Mortgage Finance Association