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‘It’s disturbing’: One in seven homeowners with a mortgage have no buffer saved

Making the decision to go with a variable or fixed rate mortgage can be difficult. Will interest rates rise or fall? Even the experts who commentate on the property market on a regular basis don’t have the answer. With interest rates currently at historic lows, however, they are likely to rise again at some stage over the 20 plus year term of a home loan.

According to Canstar, as of March 2017 the average standard variable home loan rate for owner-occupiers in Australia was 4.47% per annum, while for three-year fixed rate home loans it was 4.15%, making fixed rate mortgages very popular with borrowers at present. So, should you follow suit?

Why choose a fixed rate home loan?

A major advantage of a fixed rate loan is the certainty it gives you that your monthly mortgage repayments will stay the same over the fixed term period (which can generally be from one to five years). For first home buyers especially, this can give peace of mind knowing this large chunk of your monthly budget will not change.

What are the disadvantages of a fixed rate home loan?

Fixed rate loans tend to be more inflexible than variable rate home loans and may come with a high cost if, for any reason, you break the contract. Of course, you can also miss out on any interest rate decreases that might occur during the fixed term.

You can get a feel for the current lending landscape, fees and conditions by using a home loan comparison site and then speak to your mortgage broker to help select a lender and loan type. The overall lending marketplace is a smorgasbord of choices these days and comparing apples with apples can be hard without expert advice.

So, when is a good time to choose a fixed rate home loan?

Unfortunately, there’s no right answer to this though your mortgage broker can help you decide what’s best for your particular situation. Currently, most one-year, two-year and three-year fixed rate loans available are sitting at lower interest rates than average standard variable rate loans.

Recent news suggests that interest rates may stay stable until at least mid-2018 and are unlikely to jump substantially over the next two years. Your mortgage broker may factor these conditions into account when helping you choose and apply for a home loan.

What fixed term should I choose?

Again, this depends on your personal circumstances. One-year and three-year terms are the most popular but if you would feel a lot more secure with stable payments over a longer period then you might consider a longer fixed rate term. Remember, however, that if interest rates shoot up in that time you would be in for a hard landing at the end of the term as your repayments would suddenly rise substantially. If possible, putting a little extra money aside each month might provide a buffer and soften the impact if rates are higher at the end of your fixed rate term.

Your mortgage broker may advise hedging your bets with a mixed or split loan where a portion of the total sum borrowed is on a variable rate and the remainder on a fixed rate.

Whatever the type of home loan you choose, or a lender will provide, meeting your monthly mortgage repayments is a major obligation. When considering all your options with the help of your mortgage broker also ask about loan protection to safeguard your financial future in the event of serious illness or involuntary unemployment. An ALI Loan Protection Plan is easy to take out, with no medicals required, and offers flexible payment arrangements to suit your particular circumstances. Contact your local ALI-authorised mortgage broker or request your quote here today.

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