So you’ve found that dream home and now you’re looking to finance the purchase. This is a critical junction in your life. Committing to a home loan will be a decision that will affect you and your family for a good part of your life – lucky you if it doesn’t.
There are plenty of home loan options on the market to choose from, however, finding the home loan that suits your short and long-term lifestyle is vital.
One of those biggest decisions may be whether to lock in your home loan rates with a fixed mortgage or play the market with a floating rate home loan. Below is an easy to follow guide to fixed and floating rates.
Fixed rate home loans
As the name suggests, a fixed rate home loan is when your rates stay the same throughout the length of your contract. Typically, these contracts can last between six months to five years.
Fixed rate home loans are perfect for people that want consistency in their repayments.The main benefit of fixing your rate is that your repayments will not fluctuate as the official cash rate changes, allowing you to know the exact amount you’ll be paying each month.
Currently, we are experiencing all-time lows in fixed interest rates. With many lenders offering fixed rates at around 5% p.a.
The major downside of this is that you will not be able to take advantage of any downward changes in the official cash rate or pay off more than the agreed amount if you come into extra money.
You are locked into paying a fixed rate for the agreed term unless you are willing (and able) to pay a break fee. The total of this will depend on a number of factors including your lender, the current interest rates, length of term and loan amount. The break fee can often be worth it in the long term.
Floating rate home loans
With floating home loan rates, your monthly repayments will be governed by any fluctuations in the official cash rate. This means your monthly payments could vary each month.
Generally, the floating rate will be higher than the fixed home loan rate. Currently, the standard floating home loan rate offered by lender’s is around 5.80% p.a.
The main advantage of this home loan structure is that it allows you to be flexible in your repayments. If the official cash rate decreases, so will your interest rates. If this occurs and you maintain the same contribution, it could allow you to pay off your loan faster.
Another benefit to floating rates is it can be easier to alter your mortgage structure if your financial situation changes. Depending on your lender, refinancing, larger contributions, or switching to another lender may incur much smaller fees compared to breaking a fixed rate home loan.
The major downside to floating rates is that as the official rate goes up your repayments will increase as well. This could mean you are scrambling to find extra cash if your repayments increase rapidly.
Can I combine the two methods?
It is possible, depending on your lender, to combine the two. This would result in you effectively splitting your repayments, with half being repaid as a floating rate and the other by fixed rates, or by arrangement with your lender.
If you are unsure or need advice about which type of rate is best for your situation, make sure you speak to a trusted mortgage adviser. At The Mortgage Supply Company, we have extensive experience helping people choose the right home loan for them.
Whether you would like the most competitive rates on your first home loan or would like advice on how you could ensure you are on the correct structure for your needs, we are happy to provide free friendly advice. Contact us today.
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