Q: I am thinking about refinancing my home loan but I’m not sure whether to get another fixed interest rate or switch to variable. I’ve had a fixed loan for three years and in that time interest rates have come down a lot, so I am nervous about getting another fixed interest rate in case the same thing happens! What do you think?
A: When a fixed loan term ends it is the perfect time to take a moment to reassess your home loan.
It’s important to consider if you are still happy with your lender, review your loan’s features and flexibility to ensure it still offers what you need it to, and decide if you want to lock in an interest rate with a fixed term or choose a variable home loan, just like you’re doing now.
When deciding between fixed and variable home loans, there are some simple questions you can ask yourself to help you work out what’s right for you.
What is the likelihood of rate cuts or rate increases in the next few years?
While it’s impossible to know for sure which way interest rates are going to go, it’s still worth considering economic conditions, historical cash rate movements and what the experts are predicting about whether there are rate cuts, or rises, coming. For instance, right now we’re more than likely near the bottom of the interest rate cycle, and while there may be another rate cut on the cards, I don’t believe rates will go much lower.
Would you be better off with a fixed repayment?
If your budget is tight or you operate best when you know exactly what your outgoings will be, a fixed interest rate may be for you. It will lock in your interest rate for the agreed loan term with no risk of a rate rise.
Do you want to make extra repayments?
If you want to try to pay off your home loan faster, the flexibility of a variable rate home loan might be better for you because, typically, you can’t make extra repayments when you have a fixed interest rate home loan. You would also benefit from any rate cuts with a variable home loan, but you will also be at the mercy of lenders if they put rates up.
Do you want the best of both worlds?
If aspects of fixed and variable home loans appeal to you, a split home loan might be the answer. This is where you can choose how much of your home loan you fix and how much you keep on a variable interest rate, so you can ride the waves of interest rate changes along with the market, while also getting some benefit out of both options above.
It’s not as easy as saying that one type of home loan is better than another, you do just need to consider your circumstances and what would suit your needs better.
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