Home loan interest rates
The interest rates available on home loans can vary a great deal. While it’s natural to focus on the size of your monthly payments or how long it will take you to pay off the loan in its entirety, paying close attention to interest rates themselves is vital. Individual borrower needs vary, but making the wrong choice could mean that you end up paying a lot more than you need.
Comparing interest rates
Comparing home loan interest rates can be difficult because they’re presented in different ways. When you’re looking for a loan, always check the comparison rate. This figure is designed to make it easy for you to see which loans offer the best value in simple monetary terms.
There are different types of interest rates you can choose from, and which will be best for you will depend on your circumstances.
Fixed interest rates
A fixed interest rate will not change at any point, so you will always know exactly what your repayments will be. This can make it easier to budget. The rates offered on loans like this are usually a bit higher than on variable rate loans, but if the RBA cash rate rises, you will save money compared to what you would have had to pay otherwise. The main downside of fixed rate loans is that they don’t offer much flexibility and if you want to leave them early you may have to pay a break fee.
Variable interest rates
Taking out a loan with a variable interest rate means that what you pay will change over time. These loans usually offer the lowest rates available, but it’s important to note that what you pay can go up as well as down, depending on the national interest rate. Loans like this often offer extra features such as the ability to make extra repayments at no charge or to set up an interest offset account.
Split interest rates
Loans offering split interest rates basically let you fix part of the loan and pay the rest at the variable rate. This reduces the amount of risk involved but gives you some of the advantages offered by the variable rate, such as lower initial costs and the prospect of saving money if the RBA cash rate falls.
Things to consider
Before deciding which type of interest rate is right for you, you should ask yourself the following questions:
- How careful do you need to be? If you are on a low income, security will be more important.
- How flexible do you want to be? Would it significantly benefit you to be able to pay the loan off early?
- How much money can you save up each month with the rate you are considering?
- How might your income change over the duration of the loan?
If you are still unsure what type of loan suits you best, discuss these matters with a financial adviser. Making a good decision at this stage can help you avoid financial difficulties and mean you’re not paying more than you need to overall.