- Posted 30 Jul
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When it comes to a home loan there are two kinds of interest rates; fixed and variable. While it sounds like a great idea to fix the interest rate at a low number, there are actually some very good reasons to leave the interest rate at variable.
The Truth About Fixed Rates
While it sounds like a good idea to fix your interest rate if there is a historical low, generally speaking those who fix their rates pay for it in the long run. That’s essentially what a fix is; trading opportunity for a lower cost for the security of knowing what the interest on a home loan is for a set period of time.
When the RBA lowers the cash rate, it means that homeowners who have a variable interest rate get a huge opportunity to pay off their loans more quickly. The same opportunity won’t apply to those who have fixed their rates, and who are now locked in to a certain amount for a fixed period of time.
The trade off is, of course, if rates go up then those who fixed their rate may come out ahead.
The Strategy For Paying Off Variable Loans More Quickly
Feast and famine might sound like a negative way of describing paying off a loan, but for those who benefit from variable rates understand that it’s actually a legitimate way to pay off a loan more quickly.
If someone has a loan at 8% interest for example, that might be a healthy, respectable monthly payment. If that interest rate drops to 4% though, then the homeowner would gain a definite advantage from paying off as much of the loan as possible during the lower interest period by keeping their mortgage payments the same as if the interest was still at the 8% rate.
If the interest rate moves back up, then the homeowner will have to adjust accordingly, but there will be a great deal less principal to pay following the bigger payments and period of lower interest.
Never Too Late To Change
Just because someone has a loan with one bank doesn’t mean the homeowner is stuck with that loan. It’s possible to refinance with another bank, essentially paying off the first loan by taking out a second with a different provider.
This can alter the interest rate available, and it can make it a lot easier to pay off a loan more quickly than would have been the case with the original loan provider.
With that said, it’s important for homeowners who are thinking about switching to take a careful look at their numbers. While a lower interest rate can lead to significant long-term savings, refinancing and paying off the original loan early may both come with expensive early termination fees. Always do some research and talk to an experienced mortgage broker before making any changes..
Australian Credit and Finance is a good place for first time homebuyers to examine their options before sitting down with a bank representative to discuss options they would like to pursue. Contact us today to discuss all your home loan options.