Home loans - To fix or not to fix?

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Australian interest rates have been at historic lows for some time, prompting much debate on whether or not now is the time to ‘fix’ the interest rate on your home loan.

Everyone has one eye on the banks' fixed rates. In Australia the base interest rate has been plummeting since 2012 and has now been maintained at an extraordinarily low 2% for most of 2015. Is now the best time to switch to a fixed rate home loan or should you continue to make savings with a variable rate loan option?

A fixed interest loan allows you to ‘lock in’ an agreed interest rate with your lender. This way you don't have to worry about the rising and falling interest rates of your loan over time, or even if the Reserve Bank of Australia decides to raise the national base rate of interest. Usually ‘fixed’ for a set period (often from one to five years), the benefit of having a fixed rate home loan is that you always know exactly what your repayments will be each month.

Whilst having fixed monthly repayments is great for your peace of mind, there are some disadvantages to taking a fixed (rather than variable) home loan option. Fixed rate home loans often have less flexibility than a variable rate loan arrangement; you may be restricted from making extra repayments and, if the interest rate falls, you will miss out on any incremental savings.

For those still sitting on the fence, it’s well worth considering a partially fixed or split rate home loan option. This type of loan arrangement is split, with a portion of your loan being paid at a fixed rate and the remainder being paid at a variable rate. This type of loan will give you some reassurance in knowing roughly how much you will need to pay each month - whilst also making some financial savings if interest rates fall. If interest rates rise, you won’t incur any great cost as only part of your loan is fixed.

The decision to fix or not to fix your home loan interest rate really comes down to each of us as individuals and how much financial risk we are willing and able to take. As with all such decisions, you should consider speaking with an expert. If you’re thinking about a new home loan or switching from your current provider - why not discuss your options with a Liberty Adviser today.

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