Is a fixed-rate home loan the best choice for you?

Variety is the spice of life, right? Holidaying in far-off places, wearing different socks every day, having a variable-rate home loan. But for some of us, not knowing exactly what to expect from our mortgage payment is our version of skydiving.

Locking into a fixed-rate home loan can provide this certainty, for the fixed term at least. Because your rate doesn’t change with the market, your monthly repayments will stay the same. That makes budgeting easier and maybe even means you’ll have a bit left over to try that sensible new coffee place.

Let us help you decide whether a fixed-rate is right for you.

What is a fixed-rate home loan?

As the name suggests, a fixed rate is one that remains unchanged for the duration of your fixed-rate period, regardless of what’s happening in the market. Usually that’s 1-5 years, but it can be longer. When that period ends, your loan will revert to a variable rate.

How are interest rates calculated?

Rates are set by the Reserve Bank of Australia (that’s called a “cash rate”). Banks can then choose whether or not to pass on to their customers any rate increases or decreases.

With a fixed-rate home loan, your interest rate isn’t impacted by changes your bank makes. If the cash rate increases, your repayment stays the same.

What happens if you want to change your rate?

Of course, if the cash rate decreases you might want to switch to a variable rate (one that changes with the market). There might be fees involved if you’re still in your fixed-rate period, so make sure you do the maths to see if you’ll really be better off.

Can a fixed-rate loan still be flexible?

One of the most effective ways to save on your home loan is to make extra repayments. This is also one area where many fixed-rate loans fall down, but there are options around.

The best fixed rate home loans still offer flexibility. ME’s Flexible Home Loan lets borrowers make additional repayments of up to $30,000 during the fixed-rate period at no extra charge, so you can turbocharge the benefits of fixing.

Do you know the risks?

It’s easy to be romanced by a great fixed rate. But, like J.Lo and P.Diddy, some relationships are best kept to 1-5 years. Make sure you check out the variable rate you’ll pay once the fixed term expires. This ‘revert’ rate can be a lot higher than the fixed rate, quickly undoing the gains you enjoyed during the fixed-rate period.

Plan ahead: figure out how much your new monthly payment will be ahead of time, so you’re not stung by rate shock. Or, plan even further ahead and look for a lender with a reputation for competitively-priced home loans – fixed and variable.

If you’re less ‘skydiving into a cavern’ and more ‘using a different brand of peanut butter’, a fixed-rate home loan might be right for you. Doing your research ahead of time means you can lock in the best rate and avoid any nasty surprises when it ends.

This article originally appeared here.