Interest rates are a vital component in determining how much you’ll pay throughout your home loan tenure. With so much uncertainty around them, you might be wondering which home loan is right for you. Figuring this out is indeed the first step toward a successful home purchase. That’s why, we’ve curated this fixed rate vs variable rate blog to guide you make the right decision.
When taking out a home loan, knowing the difference between fixed and variable interest rates is important. Whether you’re applying for a new loan or refinancing your current one, this comparison will prove profitable. It can help you meet your financial goals and also save money.
In fixed rate home loans, you simply ‘fix’ the rate of interest at whatever market rate is at the time of your application. It can be set for usually 1, 3, 5, or 10 years depending on the case. Keeping the interest constant throughout the loan term means you’ll know how much your monthly or yearly repayments are. One of the advantages is – it stays the same regardless of market rate volatility.
As the inflations do not affect the interest rates in fixed home loans, borrowers can predict their future repayments. Whether or not to go for it will be based on the current interest rate environment and loan terms. Your monthly payments and total loan costs depend hugely on these factors.
If lenders expect the cash rate to increase soon, your fixed loan repayments will likely be higher. On the other hand, if they expect the cash rate to decrease, you could secure lower rates. Regardless, it's wise to compare fixed rates with variable rates before deciding.
Fixed rate home loans are predictive – lenders determine the interest rate after assessing the cost of borrowing money at a definite rate for a certain period. This means they are immune to fluctuations in the economy. Once you’ve locked in your fixed rate for the stipulated time, be prepared to pay the decided interest rate right away.
Though most fixed home loan terms are for one to five years, some lenders offer up to 10 years. However, these are very rare circumstances. At the end of this period, you have two options. One is to fix the loan again for another set period at the ongoing market rates. The alternative is to convert the mortgage to a variable interest rate for the remaining loan length.
Undoubtedly, fixed rate loans have some positive and negative aspects to look out for. You need to weigh these pros and cons to make an informed decision. Here are some of them:
As the name suggests, the interest rates in variable home loans may change over time. If the market rate increases, you pay more interest on your loan balance. Similarly, you may be able to take advantage of decreased interest rates with deflation. It’s a double-edged sword, so you must wisely decide between a fixed or variable rate home loans.
Now that we are clear on the definition of what is a variable interest rate, let’s understand how it works. With variable rate home loans, your interest rate could go down or up throughout the loan tenure. Several factors come into play when the bank decides the interest rate, including the benchmark rate set by the Reserve Bank of Australia (RBA). In addition, the lenders consider their margin, risks, and benefits.
As the market is so uncertain, variable interest rate home loans might be a good option. Nonetheless, examining its advantages and disadvantages before making your choice is worthwhile. Take a look at the potential benefits and downsides of variable loans:
Selecting a proper type of home loan is important as it will significantly impact your financial stability and long-term objectives. Your decision between a variable or fixed interest rate home loan hinges on many things. This includes your future plans, risk tolerance, and prevailing economic conditions. When choosing the ideal one, keep the following considerations in mind:
If you want to take the most advantage of any home loan you take, get your financial status reviewed by a professional. Mortgage Friend is an expert in this field, helping people decide which loan type they should go for. We will review various loan options and guide you to choose the one that best suits your interest. Moreover, we can also do interest rate predictions for the next 5 years in Australia for your convenience.
Trust our expertise if you want to get one of the best fixed rate mortgages or variable rate loans in Melbourne. Call us on 0407 949 044 or email us at jkassoc@arc.net.au for more details.
The higher the inflation rate, the more will be the possibility of interest rates to rise. This way you can decide whether to go for a fixed rate or variable rate home loan. However, it’s best to take an expert’s advice before making your decision. You can contact our team at Mortgage Friend on 0407 949 044 to know more details.
As variable interest rates fluctuate throughout the loan, chances are your monthly repayments go higher if the market rate increases. On the contrary, with fixed interest rates, you have to pay the same amount every month for whatever the term is, 3, 5, or 10 years.
Yes. You can pay off your variable rate mortgage early if you make extra payments every month. However, you could be charged for making additional monthly payments than agreed in the case of fixed rate home loans.
Yes. Depending upon your eligibility, you may be able to switch from a fixed rate to a variable rate home loan. Keep in mind that you might have to pay a break fee if you choose to change before the end of your fixed term.
