When you take out a loan there are a number of different options when choosing the type of interest you will pay. But what does it all mean and which options should you choose?
Fixed Interest vs. Variable Interest
A fixed interest loan means that you are paying a set amount off your mortgage over a set time period. Within this time period your interest rate will remain the same.
Having a variable interest rate means your interest rate and repayments can change at any time. This is dependent on the lenders rates which can be affected by the RBA interest rate.
No one can accurately predict future rates, so there’s no sure way of determining whether or not you will save on interest at the end of a fixed rate term than if the rate had been variable. Rather, you may consider a fixed rate to give you the re-assurance of knowing exactly what your repayments will be over a set period and therefore the confidence to budget accurately and plan your finances.
It may not be a good idea to fix your rate if you think you might want to increase your loan (or redraw from it), sell your property, make large repayments or switch to a variable rate within the fixed rate term. You may ever want to consider a combination of the two.
Interest Only vs. Principal
An interest only loan means that you are only paying off the interest not the principle (or capital), this can be useful with investment properties, especially if you have a loan against your principal home. A principal and interest loan means you are paying the entire loan down over a set period of time, typically 30 years. This will often be the choice for anyone purchasing their own home.
It’s often a good idea to speak to your financial adviser and mortgage broker to find the best interest options on a loan for your situation.
Simon is a Financial Adviser at Insight Wealth Planning. He has an advanced diploma and masters in Financial Planning and has a strong technical background.
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The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.