Discover the key factors that influence your decision between short-term and long-term home loans, including interest rates, monthly payments, and financial stability. Learn how to make an informed choice that aligns with your unique circumstances, with professional advice to guide your decision-making process.
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“Hi everyone,
We’re in the process of purchasing our first home and I’m wondering if it’s better to choose a slightly lower interest rate locked in for 4 – 5 years of a slightly higher interest rate locked in under 2 years?
Thanks!”
(Original question on Reddit)
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The decision between a short-term and long-term home loan depends on various factors, including your financial situation, risk tolerance, and long-term plans.
Short-term loans
Short-term loans (under 2 years) often have higher interest rates compared to long-term loans. However, they come with fewer repayments and potentially higher monthly payments. Since there is less time for interest to accumulate on the loan, you might end up paying less overall. Short-term loans might be more suitable if you anticipate an increase in your income or plan to refinance the loan within a few years.
Long-term loans
Long-term loans (4-5 years or more) generally have lower interest rates. They allow for smaller monthly payments spread out over a longer period. This can be beneficial if you prefer stable, predictable payments that fit comfortably within your budget. However, the total amount of interest paid over the life of the loan can be higher.
Professional Advice: Consult with a finance professional who can provide you with personalized advice based on your specific financial situation and local market conditions. They can run various scenarios and help you make an informed decision.
It’s important to consider your personal circumstances and consult with a financial advisor before making a decision. Factors such as your income stability, the current interest rate environment, and your comfort with the monthly payment amount should all play a role in your decision.
Hope this helps.
Regards, Clive Fernandes (Financial Adviser)
Director – National Capital
Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances or contact National Capital.
