Fixed rate or variable rate home loan? Why not have the best of both worlds!
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Choosing between a fixed or a variable loan can be a difficult exercise. Below is a summary of the positives and negatives of both fixed and variable rate loans… and an option to get ‘the best of both worlds’ by taking out a split home loan!
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Fixed rate loans
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Under fixed rate home loans the interest rate is set for a certain period of time, giving borrowers the security of knowing what their repayments are during the fixed rate period.
There are a number of positives and negatives associated with fixed rate home loans, these are some of them:
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The positives
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- Most fixed rate loans allow for extra repayments to be made during the fixed term period of the loan.
- Most fixed rate loans allow for redraw facilities.
- With fixed rate loans, the borrower knows what repayments they need to make for the duration of their loan, so they can budget accordingly and there are no ‘surprises’.
- Fixed rate loans are not affected by the interest rate market and wider economy, the rate stays the same for the life of the loan.
- There are some more flexible fixed rate products available in today’s lending market which can capitalise on the current low interest rates.
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The negatives
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- Fixed rate home loans are generally more rigid in their terms and conditions than variable rate loans.
- Some fixed rate loans will charge for making early repayments, so the borrower may need to pay a fee to make early repayments or keep the loan for the original term and full interest amount.
- If the interest rate for a fixed rate loan is lower during high interest periods, it can also be higher during lower interest periods than the rates than would otherwise be experienced for a variable rate loan.
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Variable rate home loans
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Variable rate loans provide borrowers with a great deal of flexibility and the capacity to benefit from any drops in interest rates that occur during the life of their loan, depending on the lender.
There are a number of positives and negatives associated with variable rate home loans, these are some of them:
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The positives
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- Variable rate home loans generally give the borrower more flexibility.
- Variable rate home loans can include lots of extra features not offered by fixed rate loans, including special, low introductory rates for an initial period of the loan.
- When market interest rates are low, mortgage repayments are also usually low for a variable rate loan.
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The negatives
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- Variable rate home loans can be riskier than fixed rate home loans as they can be heavily impacted by any rises or falls in interest rates
- As variable rate loans are subject to interest rate fluctuations, the borrower is unable to accurately budget for his / her outgoings each month with a variable rate loan.
- Changes to the borrower’s financial situation can be further impacted by fluctuations in variable rate loans and the repayments due on their mortgage.
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Have the best of both worlds… split your loan!
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A split rate loan allows you to effectively ‘split’ or divide the amount of your loan that is set at a fixed rate and the amount that is set at a variable rate.
So, part of your home loan will fluctuate according to the interest rates of the day and the other part of the loan will remain fixed at the agreed rate of interest for the fixed rate period.
In a nutshell, this means that you can take advantage of the benefits of both a fixed rate and variable rate, regardless of the economic situation.
If you are looking for a sense of security when it comes to your home loan but also want to be able to pay off some of your home loan ahead of time and not incur early repayment fees for doing so, then a split home loan may be the ideal option for you.
RAMS Home Loans has a range of split home loan options. To find out more about the right home loan to suit your needs, contact RAMS today.
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