Advantages of Fixed Rate Vs. Variable Mortgage
If you’re in the market for a new home, you’ll probably need to apply for a loan.
Choosing a home loan is one of the most critical decisions you’ll ever make, considering it purchases a lifelong asset, so it’s essential to pick the right type of loan for your circumstances and needs.
Home loans come in two forms – fixed rate vs. variable home loans – and each can significantly affect your future financial circumstances.
Here, we discuss the two main types of home loans and the pros and cons of each to help you pick the right one for you.
Fixed-Rate Home Loans
A fixed-rate home loan has a fixed interest rate over the period required to repay the loan. It is ideal for people with a low-risk appetite as the repayment amount remains the same during the fixed term, making it easy for you to stick to a budget and pay off your loan.
The main advantage of a fixed home loan is that it protects you against a future interest rate rise. However, if interest rates fall, you are stuck with the higher fixed rate, which could cost you money.
Fixed-rate home loans may also not enable you as the borrower to access a redraw facility during the loan period. Note that the fixed loan rolls over to a variable home loan at the end of the borrowing period, so if you refinance or pay off your loan early, there may be significant costs associated.
Variable Rate Home Loans
Variable-rate home loans differ from fixed home loans in that the amount of interest you’ll pay varies across the term of the loan.
Lenders decide interest rates on their loans depending on the RBA’s official cash rate. When interest rates fall, lenders follow suit and drop the interest rate on the variable home loan. However, the reverse is also true, which in turn increases interest rates and loan repayment amounts.
The main advantage of variable home loans is the flexibility and range of features they offer, which come in especially handy if your life or financial circumstances change.
Many variable rate home loan lenders allow borrowers to make additional repayments to pay off their loan early, saving them money in interest rate payments.
These loans also offer an offset account facility, which reduces the overall amount of interest a borrower pays for their loan and a redraw facility that enables borrowers to access additional funds if needed in the future.
If you’re considering using a variable rate home loan, remember to account for future interest rate rises and higher loan repayments so that you do not default on your loan.
Essential Tips to Consider Before Picking Your Home Loan
When taking out your mortgage, consider your risks carefully. Do you prefer to lock in your interest rate for the fixed term of the loan so that your loan repayments remain the same? Or are you open to interest rate changes on to the loan, which could increase or decrease your loan repayments per the RBA’s official cash rate?
As yourself the following questions:
· Could you still afford your monthly loan repayments if interest rates rise?
· Have you studied interest rate trends? Are they rising or falling?
· What mortgage payment can you afford today?
· How long do you want to live on the property?
Considering these factors could save you money and determine the amount you’ll eventually pay for your home once you settle the mortgage.
Fixed-Rate vs. Variable Home Loans – Which Should You Choose?
So, which loan is best to take out – a fixed rate or variable home loan?
This decision can be challenging. However, if you can’t decide between a fixed rate and a variable home loan and want to hedge your risk, you could split your mortgage between the two types of loans. This option gives you flexibility and control in one loan.
For instance, you nominate a portion of your loan, say a 50:50 ratio, to a fixed home loan and the remaining amount to a variable home loan. This way, you benefit from the best of both worlds, enjoying the flexibility and features that come with a variable home loan while enjoying peace of mind and predictability of a fixed rate home loan.
Ready to get started on purchasing the home of your dreams? Reach out to one of our home loan advisors today or contact us online to get more information on the best mortgage loan for your financial goals and circumstances. We will help you pick out the loan, specify the loan terms, and determine the repayment period, so you don’t end up paying more than you have to on your most important life purchase.
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