Picking a home loan

With current variable mortgage interest rates low – and fixed-term rates even lower – there is plenty of home buyer interest in either getting or refinancing a home loan. So – here are a few common questions that we get asked, and our response.

Q: Should your decision for fixed or variable home loan be wholly guided by the current market and the official interest rate?

There’s a lot more than just the current interest rate to think about when you’re deciding whether to go fixed or variable. Currently fixed home loan rates can look very tempting – on CANSTAR’s database, average 1,2 and 3 year fixed rates are all lower than the average basic and standard variable rates. Fixed rates have certainly been a popular search item in recent months.  However if you fix your home loan and then end up needing to break the contract for some reason – perhaps because you decide to move house or want to refinance – you could end up paying a large break cost.

Essentially, some things you need to think about when deciding between fixed or variable include whether you are likely to move in the near future. If so, a fixed rate may not be for you. Also think about how important it is for you to have certainty in your repayments. If you’re on a tight budget and you absolutely don’t want your repayments to change, then a fixed rate can give you that certainty. Also weigh up where you think the official cash rate (and by association, home loan interest rates) are headed – but remember that financial institutions are also continually analysing this and have already factored their predictions into the current rates on offer! Finally of course the current market and rates on offer should play a part.

And remember you can always hedge your bets by fixing part of your home loan and leaving part on variable rates (or in other words, splitting it). Try our split home loan calculator and play around with some scenarios.

Q: Is it essential to anticipate changes in interest rates when taking out a mortgage?

It’s absolutely essential to anticipate changes in interest rates when taking out a mortgage. For most people, particularly first home buyers, it’s a lot of money that is being borrowed and it’s being borrowed over a long timeframe. Interest rates are without a doubt going to rise – and fall – over the life of your loan.

So don’t leave yourself too short of spare cash – you should always factor in a 2 or 3 percent rise in interest rate when you’re deciding whether or not a loan will be affordable.

Of course, your household income will hopefully also increase over time, which will in turn make your mortgage more affordable. It’s always better to be cautious and conservative though. It’s something that’s strongly recommended by APRA and ASIC.

Q: Is your choice of fixed/variable/split mostly about your appetite for risk, or simply about budgeting what’s right for you?

Home loan interest rates are so low at the moment in historical terms that there’s very little risk either way! Choosing between a fixed, variable or split mortgage is mostly about deciding what’s right for both your lifestyle and budget.  Some people probably like to try and outsmart their financial institution by playing the fixed/variable market, but it’s more important to make a considered decision that suits your household budget and priorities, and leave it at that.

You can compare home loans here, and find out more useful information for first home buyers here.

Picking a home loan