Home loans are undoubtedly one of the biggest investments most of us make in our lives, so it’s easy to be lulled in with great looking introductory deals. But as well as being the biggest investment, it’s also the longest investment so it’s important to compare the long-term benefits of home loan types like fixed and variable.
When considering a fixed rate home loan, compare the interest rate against its many competitors as a starting point. However, it’s also worth understanding how a fixed rate mortgage works, and its benefits, before making any final decisions.
Generally speaking, a fixed rate home loan locks a customer in for an agreed term, usually between one to five years. While this provides homeowners with greater financial certainty, if the Reserve Bank of Australia (RBA) drops official interest rates, you’ll be locked into the pre-existing, usually higher interest rate. However, if interest rates move in the opposite direction, you’ll be on a winner, as you’ll be sheltered from paying a higher impost.
With a variable rate home loan, the interest rate you’ll pay usually moves in tandem with any moves made by the RBA – although the lenders can make additional moves beyond those of the federal bank.
When considering a variable rate home loan, compare how they usually offer the flexibility of making extra and/or lump sum repayments, which is useful if you plan to pay off your home loan(s) faster.
Another feature often associated with a variable rate home loan is a ‘redraw’ facility, which lets you apply any surplus cash against your home loan instead of a traditional savings account. This will reduce the extra interest you’ll pay, yet still gives you access to the extra repayments, if required, at a later date, for any unforeseen expenses, such as medical bills, an urgent trip and so on.
Also beware, that with a redraw facility, you can only redraw additional payments, not the normal repayments that your home loan schedule requires.
Secure a home loan that is going to suit your long-term goals by assessing all of your options, not just looking at short-term introductory offers. To compare Australian variable and fixed rate home loans use the RateCity home loan comparison tool and the repayment calculator to see which loans suit you long-term.