Is It Time to Fix Your Interest Rates Now?
As its name suggests, a fixed interest in your home loan will allow you to fix the interest rate of your loan for a certain period of time, mostly in one to five years. After this fixed period, the interest rate will go back to its standard variable rate. If you want, you can then fix it again. Fixed interest rates are either conventional loans or loans that are guaranteed by the state government departments responsible for providing housing. Is it time to fix your interest rates? Read on and decide for yourself.
The monthly payments are equal to the interest rate multiplied by the principal, added with a small percentage of the principal. Because part of the principal is paid every month, the interest payment of the remaining principal gets less as well. Thus, a bigger amount of your monthly payment goes to your principal. In other words, at the start of the loan, most of the payment goes to the interest; at the end, the payment goes to the principal.
Advantages of a Fixed Interest Rate
Getting a fixed home loan means that you are well aware that you are paying an interest every month. This way, you are able to plan ahead and easily budget, compared to having a variable rate home loan. You only pay off a small amount of the principal loan every month which automatically increases the equity of your home, unlike the case of an interest-only loan. A fixed rate home loan is a good choice if you have worries about making repayments should your interest rate increase.
Disadvantages of a Fixed Interest Rate
A fixed interest rate mostly cap the amount of extra repayments that you can make. This means that you cannot pay them off quickly like with a variable home loan. There is even a chance that you will be slapped with a penalty of break costs if your home plan ends early. Also, these interest rates do not come with extensive redraw facilities or offset accounts. Even when you are covered from rising interest rates in the fixed rate period, rate fixing will deprive you of falling interest rates.
There are mortgage brokers selling fixed-rate mortgage where the rate is fixed for only the first five years. Take caution with these and ensure that the interest rate that they quote you covers the whole life of the loan. No-cost loans are where closing costs are rolled into the loan, so you end up paying more over the lifespan of the loan because you are paying interest on the closing costs.