Short-term gain may lead to pain

WITH interest rates sitting at historical lows and fierce competition between lenders to attract and retain customers, many borrowers are considering their home loan options.

Over the past few months many lenders have heavily discounted their fixed rates, bringing fixed rates to all-time lows.

This is encouraging many locals to consider fixing all or part of their home loan.

It is important to weigh up this decision carefully as fixed loans and variable loans both have pros and cons, in terms of loan flexibility, features and costs.

Put simply, variable rate loans tend to be more flexible (with features as well as the interest rate) and you can take advantage of falls in market rates. But when rates rise, repayments rise too.

Fixed rate home loans give peace of mind, knowing what the repayment amount will be for a set period of time.

However, once you are locked in to a fixed loan, you can incur break costs and a switch fee to move away from that loan type during the fixed period.

The cost involved with breaking a fixed rate term can be high depending on when and how long you fixed for and what the interest rate was at the time compared to where it now sits.

Another point that borrowers need to note is that fixed rate loans will not always offer features such as offset, redraw, or the ability to make unlimited extra payments without penalty.

So, if you are thinking about switching from a variable rate loan to a fixed rate it is important to weigh up the pros and cons before locking in.

If you do decide to apply for a fixed rate home loan, keep in mind that the interest rate may move down (or up) between application and settlement.

Some lenders may offer a rate cap, which means that if on your settlement date the advertised rate has fallen below your capped rate, you will benefit from the new, lower fixed rate.

Those who want the best of both worlds and to take advantage of the pros of each rate type - stability and flexibility - often choose to split their loan amounts between fixed and variable.

There is no right or wrong choice when entering the fixed versus variable decision process - there are risks associated with both loan types.

The key is to educate yourself as much as possible by researching your options, taking into considerations the wide range of loans and lenders available.

Self-education is so important, as is taking ownership over your mortgage situation.

After all, your mortgage is one of the biggest financial decisions you will make, so don't make it lightly.

For more information contact Richard Windeyer on 1800 01 LOAN.

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