September 29, 2018
When it comes to choosing a home loan, it's not a one size fits all. It's the same when choosing a fixed or variable rate. Each has pros & cons and suits people differently.
It's important to make sure that you understand the difference between a fixed & variable home loan interest rate when you're finding the right home loan for you. The type of interest rate you choose will have an impact on your budget for years to come, so making sure you understand & feel informed, will help you make better choices for a better life.
What is a fixed rate home loan?
A fixed rate home loan means your repayments are at a same rate for however long the fixed term is for. Usually a fixed term if for between 1 - 5 years, but there are longer fixed rate terms available. After the fixed term is complete, your rate will become variable unless you sign another fixed rate contract.
The benefits of a fixed rate is predictability. Your home loan repayments will stay the same regardless of what's happening in the finance market, giving you certainty with your budget and how much you are required to repay.
However, should interest rates drop you won't benefit from any cuts in repayments. Your repayments will continue at the same level for the entirety of the fixed rate term. Fixed rate home loans can also be expensive to break or pay out early, and some lenders will limit additional payments on the loan.
Lots of people love the predictability of the fixed rate home loan and are happy to take the chance of paying a little bit more should the rates drop. While variable rate loans have historially been more popular in Australia, with the official cash rate & interest rates sitting at historical lows, borrowers are increasing happy to fix a low rate and repayments.
Do some calculations of your own with our interest rate calculator
What is a variable rate home loan?
A variable rate home loan is exactly what it sounds like: an interest rate which can vary up or down, affecting the amount of repayments. While a fixed rate home loan will give you a predictable repayment amount over a period of time, repayments on a variable rate home loan could change significantly over time.
The interest rate on a variable rate home loan can be changed by your lender at any time, with changes based on factors such as the RBA official cash rate, changes in market interest rates or general business decisions made by your lender.
Many people love variable home loan rates as they can take advantage of any decrease in overall interest rates, lowering their monthly repayments. Variable rate home loans also tend to be more flexible, with more features like a redraw facility, and the ability to make early repayments. This means that if you have surplus cash each month or want to make a lump sum payment, you can pay off your principal loan without any penalty.
However, this means that repayments can also be unpredictable, making it very hard to budget. While some people love the flexibility of a variable home loan, for others it can be too uncertain.
How do I make the decision between fixed & variable?
It's important to first understand the difference, as well as the affect it will have on your budgeting & repayments. You then need to think about which one would feel more comfortable for you, your partner & your budget. You could make a bet both ways and fix only part of your total home loan and leave the remainder on a variable rate, giving you at least some flexibility in repayments.
Find out more with Mortgage Choice in Rosanna & Ivanhoe
Talk our team of home loan experts in Rosanna & Ivanhoe to find out more about your options when it comes to your home loan rate. We're here to help, and talk you through each of the options - especially if this is your first home or investment property!
Find out more about our home loan service at Mortgage Choice Rosanna & Ivanhoe.
Call us on 0419 587 863 or click on the Contact Us button at the top of the page.
