Fixed, variable or hybrid? What's best for your home loan?

For most, taking out a home loan is a difficult undertaking. Given the price of real estate in Australia, you need significant capital to gather together a deposit. In fact, one survey from BankWest suggested that the average time taken to save for 20 per cent of a first home was in excess of four years. Of course, working in industries such as mining and manufacturing, where income tends to be well above average, this time period can be significantly smaller.

Once you achieve this goal, you have other things to wrap your head around – like interest rates. While Chifley is here to help you gauge the right home loan by putting you in touch with great mortgage brokers, it always helps to do some homework on the process yourself. Let's start with a guide to the types of interest rate you will encounter.

How do you get your head around financial concepts?
How do you get your head around financial concepts?

Fixed rate home loan

When you take out a home loan in Australia with a fixed rate, you are giving yourself financial certainty for a given period. A fixed rate remains in place for anywhere between one and five years, usually negotiated by your mortgage broker with your lender. 

If your financial planning dictates that you know exactly what you are paying art all times, then a fixed rate could be an excellent decision. Should interest rates increase, you benefit from having already locked in a cheaper home loan rate.

However, if interest rates drop further then you may find yourself unable to capitalise on an even better deal. It is possible to renegotiate the terms of your loan to change the rate, but the fees associated with this are not necessarily worth it.  There maybe also restrictions on making additional loan repayments.

Variable rate home loan

On the other hand, a variable rate goes up and down in accordance with market forces. It may change in response to changes in the official cash rate set by the Reserve Bank of Australia, but ultimately the lender set its own home loan interest rate.

Why do banks change their interests rates?
Why do banks change their interests rates?

There are generally no restrictions on making additional repayments if you have a variable rate loan. Relative to fixed rates, if market forces push interest rates down, you can capitalise on those lower interest rates.

Conversely however, when interest rates go up your borrowing costs increase and adversely affect your cashflows.

The best of both worlds

There is a third option, which may suit many people's financial planning – the split (hybrid) home loan. This is where you fix a certain amount of what you borrow, while paying a variable rate on the remainder. It is essentially getting the best of both worlds, but offers less stability and flexibility than siding entirely with one option.

How do you make the right decision?

When you're choosing an interest rate on a home loan, the decision should be based on your financial resources and what's suits your particular needs. Ultimately, it is a trade-off between certainty and flexibility.

When you have not taken out a home loan before, it can be difficult to understand exactly which type of interest rate will best service your needs. This is where the expertise of the team at Chifley can prove invaluable.

We have spent 25 years providing financial service to working individuals right across the country. When you don't have the time to get working on your financial future, we can step in to help. Get in touch with our team to find out how we can help you succeed with your money.

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