There are benefits and pit falls to both options so it is important to consider your financial goals when making a decision.
Fixed
Fixed Interest loans are designed to give you certainty and of your repayment amount for a pre-agreed period of time.
The interest rate being charged will not increase or decrease during the fixed period.
It protects you from interest rate increases, but you would not benefit from rate decreases either, at least for the agreed fixed period.
You should consider if a fixed interest loan is right for you if you plan on making additional repayments or paying out the loan early, as extra and/or the full interest charges will still be applied as agreed for the fixed time.
The major benefit of FI loans is that you have certainty of what your repayments will be over the coming period, so you can budget and manage your cash flow.
If you expect interest rates to increase it is also beneficial to fix your mortgage rate so that you lock in a lower rate and do not have higher repayments.
As at May in 2018 the Reserve Bank of Australia (RBA) has not moved the official cash rate for 19 months in a row, a record in our countries history! So there is a general expectation that banks will start to life interest rates.
If you want to understand how to fix all or even part of your mortgage, speak to Skyward Financial today.
Variable
Most people have a 'standard' variable loan for their mortgage as it offers greater flexibility and features compared to other options.
Different lenders will offer different features on different mortgages for different clients. This is confusing for many people so the advantage of using a financial broker like Skyward Financial is that we can talk you through the options available for you and understand your finance goals, so we can recommend the right solution for you.
Not all banks are created equal.
Often a bank will have difference features for a different type of mortgage. Even if they are Variable rates, they might still have 2 or 3 versions of this product, and each with different features, benefits and costs.
'Off-set' (*link to other article) Accounts are only available for variable loans. This is because the funds in the off-set account reduce the principal you are paying interest on, and because interest on your loan is calculated daily, if the amount in your off-set changes during a month so will the amount of interest you are repaying.
An off-set account is a major benefit of a variable mortgage and one that could save you thousands each year and tens of thousands over the life of you loan.
Another benefit of a variable mortgage is the ability to repay the loan earlier.
Whether this is a few extra hundred dollars a month or more, with a variable rate loan you are not penalised for any early or additional repayments, unlike a fixed rate loan.
Often, when lenders offer this feature they will also have a 're-draw' facility. This enables you to draw back out any additional amounts you have put in, which gives you flexibility in case you need the cash. For example, if you have paid an extra $200 a month for an entire year to your mortgage, you would have $2,400 available for re-draw.
Be mindful that if you re-draw funds the amount of interest you repay grows because the principal owing is now larger.
If you have any questions please contact Skyward Financial