What Is a Fixed Rate Mortgage?
Like credit cards, choosing the right loan for your mortgage can be overwhelming, especially with so many options. There are different advantages and disadvantages for each, so it’s never a simple process.
A huge part of finding the right loan is its interest rate. Interest rates impact how much and how long the payments will be. Fixed-rate mortgages are pretty common, but how do they work?
Here’s what you should know about fixed-rate mortgages.
What are fixed-rate home loans?
With fixed-rate mortgages, it’s pretty straightforward. The interest rate will not increase or decrease throughout the term. It’s great for those who want to know exactly what they’ll be paying each month or whenever their mortgage payment is due.
However, fixed-rate mortgages typically last for one to five years. After this term is up, the borrower will start paying at the variable rate unless they begin another fixed-rate period.
How are fixed-rate mortgages calculated?
Fixed-rate mortgages are based on the cash rate. The prediction of future cash rates is then accounted for in the fixed interest rate. When the futures suspect falls in the cash rate, the interest for fixed-rate loan terms will be cheaper. On the other side, if the economy is on the up-and-up, this can be reflected with the fixed interest rates.
Within the past five years, cash rates have been lower, which is reflected in fixed interest rates. Since 2017, many fixed terms are lower than the average variable rate, giving way to lower interest rates for mortgages.
Positives and negatives about fixed-rate home loans
With everything in life, there are always positives and negatives. And with a big decision like choosing your home loan, you should know what you’re getting into before diving in.
Fixed-rate mortgages are helpful since they’re steady payments with a locked-in monthly amount. These rate locks benefit those who are strict budgeters, as it’s easier to plan out your monthly expenses with a fixed-rate mortgage. It enables you to plan for different financial obligations without the interference of variable interest rates. You can also make additional monthly repayments when you’d like, which is a perk compared to other home loans.
There are a few disadvantages of fixed-rate home loans. If you’re in a rate lock, you may miss out on lowering interest rates, preventing you from saving money on your payments in the future. You can also face application fees and exit fees. With fixed-rate loans, you won’t have the advantages of offset accounts or redraw facilities like you would with variable rates. And if you plan on making repayments, you can’t pay more than $10,000 within a specific time until a fee applies.
What’s better: fixed or variable home loans?
While there are perks for both fixed and variable home loans, choose the loan that benefits your lifestyle and peace of mind. Though variable home loans have features like redraw facilities and offset accounts, there’s a level of uncertainty when not knowing the exact interest rate.
Variable home loans are also common. Remember, variable interest rates are dependent on the cash rate, so if the cash rate is up, your interest rate will be, too, and vice versa. Variable home loans also offer additional monthly repayments, which means your loan term can be shortened, shedding unwanted interest.
Redraw facilities in variable loans are a bonus, allowing you to borrow the money you’ve paid off for other finances. This facility can help pay for a family holiday, a new car loan, or remodeling your house. The additional perk is an offset account, which lets the borrower put aside money every month that goes towards the mortgage. This can be a good budgeting measure and enables you to take control of your monthly payments. Remember, the interest rates vary, so you should be mindful of how much you repay or borrow.
If you’re conscious about your budget and want a steady mortgage payment, fixed home loans might be your best option. If you don’t mind the fluctuating interest rates and want to take advantage of the additional financial perks, then variable loans are a good choice. Sit down with your bank and talk through the best options for you. Buying a home is a significant financial investment, and it’s essential to get the assistance of someone with knowledge in the industry.
If you’re having trouble understanding home loans, you’ve come to the right place. To find out more about fixed-rate home loans, check out Fixed Rate Mortgage’s articles about home loans today!
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