There are plenty of home loan lenders vying for your hard-earned investment dollars and typically, variable rate home loans are the most popular type.
With standard variable home loan rates your repayments will fluctuate at the lenders’ discretion. While the official cash rate is set by the Reserve Bank of Australia (RBA), lenders will often introduce rate movements independent of the RBA’s decision.
Fluctuating rates
If the standard variable home loan rate declines, the borrower’s interest payments also fall. This is the big advantage variable rate loans offer over fixed rate loans. However, if the rate rises, the borrower’s interest repayments are also likely to increase.
Rates tend to fluctuate up or down by less than one percent at a time – a typical rate movement may be quarter of a percent (25 basis points) – and while this may seem like a small amount, the additional interest paid over time can add up quickly.
Choosing a variable loan
At the end of the day, the direction interest rates are likely to take over the short, medium and long term is very hard to predict. Moreover it’s not hard to make an incorrect call – and even the best economists can get their rate predictions wrong. That said, if you think that standard variable home loan rates are likely to fall, consider a variable rate mortgage. Alternatively, if you think you will struggle to afford the repayments if standard variable home loan rates increase by 1 or 2 percent, then a fixed rate mortgage could be a good alternative. We typically advocate that a good time to fix your home loan rate is when fixed rates are within 1 percent of the average variable rate, but your decision to fix should be based on more than simply the headline rate.
With a fixed rate home loan, the interest rate is set for an agreed term, usually from 1 to 5 years. Be aware, there are restrictions with a fixed loan. For example, your lender may limit the amount of additional repayments you can make, which could prove less appealing if you’re aiming to pay off your home loan sooner rather than later.
In most situations, choosing variable rate home loans means making smaller repayments than with fixed rate loans. If you are undecided, consider splitting your home loan and hedging your bets each way. For more information or to compare home loans, check out our standard variable or fixed rates today.
