Floating Mortgages on High

Recent Reserve Bank data shows that the value of mortgages that are on floating rates rather than fixed rates has topped 40 per cent for the first time since 2002, now totalling around $67 billion.

And with many fixed rate mortgage terms set to expire in the next year, there is the possibility that more borrowers may move to floating rates in the near future.

But is that the right move?

It’s certainly something you may need to consider carefully if your own fixed rate mortgage is due to expire in the coming 12 months, or if you are in the market for a new mortgage.

If you do need to consider your next move, it is always helpful to understand the pros and cons of each type of mortgage. Loan Market can then help you to further refine your needs and match these to the right type of mortgage package for your situation.

Floating interest rate home loans – Pros

  • Your home loan repayments will fall when interest rates fall 
  • You will have the opportunity to reduce your home loan balance faster 
  • Can be very flexible and will often allow unlimited additional repayments 
  • The average variable interest rate is generally lower than a fixed home loan rate

Floating interest rate home loans – Pros

  • Your home loan repayments will rise when interest rates rise
  • If interest rates rise quickly, your home loan repayments over a certain period of time may be more than those of a fixed interest rate home loan over the same period of time
  • If you have borrowed at or near your repayment capacity, it is risky if interest rate do rise

Fixed interest rate home loans – Pros

  • You will know how much your loan repayments will be for a fixed period, regardless of market interest rate changes 
  • Protects you against interest rate rises
  • You can pick the time period to suit you; fixed terms are available from 6 months to 10 years

Fixed interest rate home loans – Cons

  • May be less flexible than a variable home loan rate, limiting additional repayment options and excluding the option to redraw 
  • If your circumstances change and you want and/or need to exit the loan early, early exit fees will apply 
  • Over the term of your loan you may end up paying more than if you had selected a variable home loan, even in a rising interest rate market
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