Where is interest rates going? Should you fix or stick to a variable home loan rate? In this video, Robert Projeski discusses how the money market can influence your mortgage choice, and the pros and cons of fixing or sticking to a variable rate home loan.
Fixed vs Variable Home Loans
Buying a house is a big investment and must be planned wisely. With the cost of housing going up almost every year, it’s best to think through your financial situation and home loan strategy. There are two common types of home loans available in the market - fixed and variable rate home loans.
Variable Home Loans is a loan in which the interest rate charged on the outstanding balance varies as market interest rates change. It fluctuates over time, because it is based on an underlying benchmark interest rate that changes periodically. As a result, your payments will vary as well.
The obvious advantage of a variable home loan is that if the underlying interest rate or index declines, the borrower's interest payments also falls. Conversely, if the underlying index rises, interest payments increase.
Fixed Home Loans such as AMO's Fixed Rate Loan are loans in which the interest rate charged on the loan will remain fixed for that loan's entire term, no matter what market interest rates do. This will result in your payments being the same over the entire term. Whether a fixed home loan is right for you will depend on the interest rate environment when the loan is taken out and on the duration of the loan.
Fixed home loans offer many of the benefits of a variable rate home loan, but with the peace of mind of knowing exactly what your repayments will be for the course of the fixed home loan period.
The two main advantage of a fixed home loan are:
- Budgeting – You know how much to save monthly. Whereas with a variable rate loan your repayments can 'vary' as rates change.
- Security – You can sleep peacefully knowing you’re safe when interest rates rise. And if you lock in at a low fixed rate, and interest rates does start to eventually rise, you will be happy knowing you are paying less than the variable rate.
Choosing between a fixed or variable home loan can be difficult. Often the initial interest rate on a variable home loan is more attractive than that of a fixed home loan with very similar terms. But because the interest rate on a variable loan can change, comparing initial interest rates is not enough. Borrowers should also take a longer-term view, considering how market interest rates tend to rise and fall in cycles.
The Role of the RBA
So who determines if variable home loan interest rates fluctuate? This role is determined by the RBA (Reserve Bank of Australia). The RBA Board meets on monthly basis to determine whether the Australian cash rate should be changed or kept steady. The Reserve Bank uses the cash rate as a tool to control Australia's inflation. Generally when the economy is weark, the official cash rate often comes down (inflation is usually lower), but when the economy is bomming, the RBA increases the cash rate. Lowering rates can really help to stir up the housing market with home buyers demanding to fix their rates before interest rates go up.
AMO Fixed and Variable Rate Home Loan
Are you worried that the money market will fall, and that you will be paying more on a fixed home loan than on a variable rate home loan? AMO gives you the option to split your loan, such as the Future Proof Home Loan, which means that you can opt to put part of your mortgage into a fixed interest rate loan, and the remainder on a variable interest rate loan - all under one loan product. You have the freedom to decide which portion of the loan would be assigned as a fixed home loan and which is on variable home loan. It can be 50:50, 70:30, or 60:40.
With AMO's Fix Rate Home Loans, you can take a loan of up to $2,000,000. If you don't have a tight budget, this option gives you the opportunity to really get into the home you've always wanted.
AMO has a loan period of 30 years, and unlike other lenders with short loan terms, a 30 year term allows you to stretch your monthly repayments. Your monthly repayments would also be considerably less, giving you and your family additional money to spend on other things such as family holidays or oversea travel.