It's the age old question regarding Mortgage Lending, should you choose a FIXED or VARIABLE interest rate??
Well there are Pro's and Con's for both scenarios.
FIXED RATES are just that. Fixed at a steady rate for a set period of time greater than 12months.
They have advantages;
* You will know exactly what your repayments will be for the period of the set rate, which can be great for budgeting.
* If interest rates go up, you can be assured that yours won't, so your monthly budget will remain in tact!
Fixed rate loans also come with their disadvantages though;
* If the interest rates drop you won't be able to take advantage of them and lower your repayments.
* If you need to make changes to your loan during this set period then you will likely have to pay "Breakage Fees" to the lender.
* If you are wanting to make additional repayments you might find there is a limit as to how much you can pay into the loan. Some lenders don't allow any additional payments to be made at all.
* If you need to Redraw against your mortgage this facility may not be offered by the lender.
So, if you would like the flexibility to make changes to your home loan for a better deal or if you might be considering selling your home then a Fixed Interest Rate is probably not the best suited for you.
A VARIABLE RATE will move up and down with the Market Rates. So over the term of your loan rates might rise or fall or both.
Whilst Variable rates are more popular, there are some disadvantages;
* Due to the nature of the rates moving up or down this can make budgeting a little more difficult, especially if your budget is tighter.
Advantages of a Variable Rate include;
* You are usually able to make additional repayments which can help you in reducing your mortgage and the interest you pay over the life of the loan.
* You will have the flexibility to make changes to get a better deal or to increase the amount of your loan if desired.
* There are usually more features that you can have with a variable rate, like unlimited redraws, make additional repayments or to have an offset account.
One way that most lenders will allow you to have a foot in both camps is to Split you loan. This simply means that part of your loan will be on a fixed rate and the remainder will be on a variable rate. This way you can secure a portion at a fixed rate while still being able to make extra payments or changes to the variable portion.
For help to work out what scenario will best work for you, give Gadsden Finance a call on 03 5443 9098 to chat with one of our friendly brokers.