The amount of interest you pay will depend on how interest is determined on the amount you borrow and the way it is calculated. Interest can be calculated at the current variable rate, a pre-determined fixed rate or a combination of the two. Each option has pros and cons, so you’ll need to consider which suits you best.
What is a variable interest rate home loan?
If your home loan has a variable interest rate the repayment amounts will change when the lender adjusts its rate―for example, when economic conditions change.
The advantage of a variable rate is that you can pay off your loan early without paying a penalty. You can also transfer your loan to another lender without loan-break costs. And if your variable interest rate falls your repayments will also fall so you have the option to continue paying the same amount and pay more off the principal. The downside is that if your variable rate goes up, so will your minimum repayments.
What is a fixed interest rate home loan?
A fixed rate loan gives you the certainty of knowing what your regular repayments will be―they will stay the same for the fixed period of the home loan, regardless of changes in the economy. You can generally fix the interest rate for up to five years, sometimes longer.
At the end of the fixed term you can arrange for another fixed term or move to a variable rate. Keep in mind that fixed rate loans are generally less flexible than variable rate loans―so if you want to change lenders or pay off your home loan during the fixed term you may be charged loan-break costs, which can be considerable.
Can I have a variable and fixed interest rate in one home loan?
Yes. If you like the certainty of a fixed interest rate but want some flexibility you can generally incorporate both options into one home loan: a split home loan lets you choose how much you repay at variable and fixed rates. You can pay off part of your loan sooner and have some protection against rate increases.
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It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.
This information is provided by AMP Life Limited. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice.