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Fixed or variable
The basic interest rate on a home loan is known as the standard variable rate. This is based on the interest rate set by the Reserve Bank of Australia, which changes according to economic criteria set by the Bank.
Many lenders also offer loans at a fixed interest rate. This means that your interest rate does not change for a given period of time – usually from one to five years.
Fixed rates are generally higher than variable rates, because they include a premium to keep the rate fixed, and thereby protect against the risk of rising rates. The longer the term, the higher the premium.
The certainty of a fixed rate can help with budgeting in the early years of a mortgage – it’s good protection against the unexpected.
As a rule of thumb, if a rise in interest rates of more than 2% would mean that you couldn’t cope, then it might be a good idea to fix at least a portion of your loan.
Usually you cannot make extra repayments or vary repayments with a fixed rate loan. These loans also carry penalties if you cancel the loan.
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