How do home loan interest rates work?
Interest is how banks and lenders make money from mortgages. Interest allows lenders to offer a large range of mortgages and help make those loans accessible to a lot of people. The rates of interest are set mostly by the banks and lenders, based on their commercial goals. A desire to stay competitive can keep interest rates at a level acceptable to the market. Other factors such as the national and world economy can influence the level of interest rates, and banks and lenders can act accordingly. They will often take the lead from the Reserve Bank, who will set the official interest rates, with an aim of ensuring economic growth without overheating the economy. There are generally two kinds of interest rate loans – fixed and variable. A variable rate loan can see interest rates fluctuate during the life of the loan. A fixed rate loan is an agreed rate for a period of time, usually between one and five years. Which one you choose is up to you.
What are the benefits of a fixed rate loan?
A fixed rate loan can be a good way to help you stick to your budget. You will know exactly how much your repayments will be over the fixed term, which can take a lot of stress out of buying a home. That is especially the case in a fluctuating market. If you are a first-home buyer and weighing up whether or not you can afford a home in the long run, fixed rate mortgages can give you some confidence in knowing your repayment amounts are not at the whim of the international economy, or local market conditions. The last thing you want to think about is having to default on your loan because of measures outside your control. However, there can be some flexibility with fixed rate mortgages. At Mortgage House, we also offer what’s called a progressive fixed rate loan. This allows you to make extra payments without incurring a penalty fee, which can often be the case. A progressive fixed rate loan can also give you access to additional features such as a redraw facility and an offset account. These are usually features you can only get with variable home loans, and they can be a big selling point.
What if my fixed home loan rates change?
One of the important things to remember about a fixed rate home loan is that while they won’t rise during the contracted period, the interest rate may be higher than the variable loan interest rate. You may also have concerns about the rates changing while you are considering which type of loan to take out, and about fixed rate mortgage changing between when you sign up and when you settle. If you are concerned about that, ask us about a rate lock. That can ensure the rate you sign up to is the rate you will pay, and you won’t need to worry in the month or so between deciding and settling. We have a range of fixed rate mortgages for you to choose from, and the access we have to the market allows us to find very competitive rates for you and your family. We have a range of different choices, over a range of time periods, to help you find a suitable deal. And we can talk you through exactly what each one means and whether or not it suits your property goals.
What if I want to wait to get a fixed loan?
If you are having trouble deciding between fixed rate mortgages or variable rate, make sure you take your time. You don’t want to jump into something too quickly. Our experience in the mortgage market can help with your decision making, and we can be there with you every step of the way. We can even help you out with identifying whether the property you want to buy fits in with your long-term goals. So, talk to us about your financial position and your goals, and we can make sure your decision is based on the best evidence available. Another thing you may want to consider is a split loan, which can be a good compromise between fixed rate mortgages and variable rate loans.
How can fixed rate periods help me today?
The security benefits of fixed rate mortgages can be amplified when the variable rate market is like it is today – at record lows. Taking on a fixed rate home loan when interest rates are low means your rate is locked in, even if interest rates spike during that period. It is almost impossible to predict when interest rates will rise, but they may never be this low again. If they do rise soon, the security of a fixed rate period can add to the security of predictable repayments. Predictability means you can maintain your standard of living and be able to make financial plans for the future with confidence.