Deciding to fix the interest rate on your home loan, or not requires serious consideration, especially since the interest rate has just increased and the current predictions of what’s to come.
TO RECAP!
A variable interest rate means your monthly instalments will fluctuate over the term of your home loan, in line with interest rate changes. When the prime rate goes up, so will your monthly instalments. When it goes down, so will your payments.
On the other side of the coin, a fixed interest rate, as the name suggests, means you fix the repayment at an agreed rate, usually for a period of two to five years. When that period elapses, you and the bank will generally renegotiate your rate.
As a general rule, a fixed interest rate is around 2% higher than a variable one because it poses more of a risk for the bank. Banks set the fixed rate based on their expectation of what the market will do, and build in some risk cushion for themselves.
WHICH WAY TO GO?
People who prefer certainty in their life may prefer a fixed rate. As they may find peace of mind in knowing that even in volatile times, their home loan repayment is one thing that’s not going to increase – if the prime rate goes up, they will be cushioned.
However, past experience and records show that over time, you are likely to pay less on a variable interest rate than on a fixed interest rate. That is because for the fixed-rate borrower to “beat the bank” and pay less, the interest rate would have to go up by more than the higher rate they’re borrowing at. So, if the prime is 8% and the buyer is granted a fixed rate of 10%, the prime would have to go up to 10% or more for the buyer to financially benefit from the decision they made. On the other hand, if the prime rate went down to 7,5%, the fixed-rate buyer, still on 10%, would be paying 2,5% more than they might have achieved had they borrowed at prime.
On balance, the fixed-rate option is better only for buyers who are willing to pay more for the security of knowing what they will pay each month. Beware of advice that suggests either a fixed rate or a rate subject to variance is overall a better deal. The pivotal point is what matters most for YOU, as your decision will have a knock-on effect on your lifestyle and personal financial wellness.
HOW ABOUT A SAFETY NET?
Whilst Select a Bond cannot predict the future, we are 100% current with the appetite of the banks and market trends. And more importantly, we are able to acquire the best possible interest rate deal on a variable rate.
If variability worries you, it may be an idea to work out the difference between what you are paying on the deal that Select a Bond gets you, and what you would have paid had you opted for a fixed-rate loan. Put the difference in a high interest-bearing account and should the worst happen and the interest rate increase past the point at which you’re comfortable, you can then use the “cash savings” to offset the increase.
There is a good chance that you will find yourself with an attractive amount in savings. And when you are comfortable doing so, you could deposit that into your home loan account, thus reducing the interest you’ll pay over the lifetime of the loan.
But before deciding on what you want to do, come and talk to us so that we can determine what type of interest rate is best for your needs, and we can find you the best home loan deal in the market.