Interest rates have been at record lows since the RBA slashed the official cash rate to 1.5% last August and after their decision to keep it the same on the 7th of February, many are wondering when the rate will start to creep up.
So, what does this mean for you? Is now a good time to fix your rates to protect yourself from future rate rises or is now the time to pay extra off your loan while rates are low?
Variable rate loans
Variable interest rate loans are all about flexibility. Essentially, with a variable rate loan, the interest rate moves up or down as the market moves. This means your loan repayments may also change month-to-month.
Many variable rate loans come with additional features, which can reduce the amount of interest paid over the life of the loan. For example, a variable rate loan with a 100% offset arrangement links your loan account to your savings account. Any funds held in your savings account are offset against the borrowed amount, reducing the interest you have to pay.
Many variable rate loans offer flexibility in terms of increased payments, allowing you to pay off your loan faster if you have additional funds available.
Fixed rate loans
A fixed rate loan is one where the interest rate is fixed for a limited period, and immune from any movements in the market. The most popular choices are three and five-year fixed interest loans, although options ranging from one to ten years are available.
Fixed rate loans allow you to make steady, regular repayments. They’re great for borrowers on strict budgets, or if you’re entering into a mortgage at a time when interest rates are likely to rise.
In the event of a fall in interest rates, being locked into a fixed rate may mean your repayments are higher than they otherwise would be. It’s also worth noting that breaking a fixed rate loan can potentially cost thousands of dollars in fees.
Additionally, many banks will charge you a fee for making extra payments towards the loan during the period it has been fixed.
Split loans – a foot in each camp
A split rate loan is when you break your mortgage into two loans – one with a fixed rate and one with a variable rate.
It’s something of an ‘each-way bet’. A split loan offers borrowers protection from rate rises (with the fixed portion of the loan) alongside the advantage of rate drops and the ability to make extra repayments (with the variable portion of the loan).
Most banks will allow you to split your loans from the outset, without having to pay for two separate loan applications.
Choosing the right kind of loan depends on your personal situation, earning capacity and long-term goals for your property. Call Launch Finance today to discuss the best way forward and to see if we can help save you money along the way.