Interest Rates... Should You Have a Fixed or Variable Rate Loan?

We have seen a lot in the media over the past couple of weeks regards the affordability of homes Australia wide and more so here in Townsville. With house prices on the rise and interest rates steadily moving up it is important to make sure that you get the right loan for you. The banks have done their best to confuse us all, and shopping for a home loan is like shopping for a mobile phone.

When looking at a home loan, the biggest issue is the interest rate should you go fixed or variable. (do not forget to add in any extra on going fees when calculating the overall rate) It is a common mistake to think that the lower the interest rate you have, the less interest you'll pay. Time will determine how much interest you pay. Below are a couple of tips when choosing a home loan for you.

1. How quickly do you intend to pay off your home loan? The faster you pay it off the less you will pay in interest. If you intend to pay off you loan as quickly as possible always look at a variable rate. Why? Interest is calculated on the daily balance of your loan, if you are making extra payments and making these weekly of fortnightly you will pay less in interest even if you are on a higher rate.  

For example:
On a $300,000 home loan by paying a quarter of your monthly home loan repayment weekly, you will save 5 years of the term of your loan and around $100,000. If you doubled the weekly payment you would save 18 years off the term of the loan and over $300,000 in interest.  

2. Fixed rates should be used when you need to budget. If the affordability of your home is a concern then you should use a fixed rate to make sure that your house hold income in not effected by any rate raises. Commonly this is in a period when you are starting a family and one parent is off work or reduced hours for a number of years. Fixed rates serve as a great tool to make sure you can maintain your budget while funds are tight. However, as soon as your cash flow improves get straight back on the variable rate and start paying down your loan as soon as possible.