When shopping around for a home loan, there are really two main options – Fixed Rate or Variable Rate.
Your choice depends on your financial circumstances and personality – whether you like to lock things down in certainty or whether you’re open to gaining the possible benefits of future changes in interest rates.
You should always seek professional financial advice before making a key decision such as a home loan, but to help you on your way, let’s take a look at the pros and cons of the two options in detail.
Fixed Rate Loan
The most secure option, a fixed rate loan will remain at a constant interest rate for its duration. This rate is agreed upon between yourself and your lender before your loan contract is signed.
Your repayments won’t increase for the agreed time period, so there will be no financial surprises.
If the base interest rate is increased by the Royal Bank of Australia (RBA) and the lenders pass the increase onto their customers, you will be protected and not affected adversely.
Your regular budget will be easier to plan and maintain, which could help you pay down your mortgage faster and live the lifestyle you want.
If the RBA decreases the base interest rate and the lenders reduce their rates for their customers, your rate will remain the same and you will not benefit from the rate reduction.
Fixed rates can sometimes be slightly higher than the lowest point of a variable rate as lenders try to average out potential fluctuations over the average course of a loan’s lifetime.
Due to some stricter rules around fixed rate loans, you may not be allowed to make additional payments when you have available funds. This means you may not be able to bring your balance down faster by paying more than your standard monthly repayment amount.
If you are in fact able to pay off your loan sooner than scheduled, you may have to pay a fee.
Variable Rate Loan
The initial rate of a variable rate loan is also agreed upon between yourself and your lender. But it will also go up or down over time, usually as a result of changes to the base rate set by the RBA.
If the RBA decreases the base rate and your lender passes that reduction onto their customers, you’ll benefit from a lower rate and lower repayments.
If your interest rate drops but you maintain your regular repayment amount, you’ll be paying down your mortgage faster and paying less interest in the long-term.
When on a variable rate loan it’s often easier to shop around and change lenders if you find a better deal elsewhere, than it would be with a fixed rate loan.
If the RBA increases the base rate and the lenders pass the increase onto their customers, your repayments will increase.
Budgeting can be harder when your interest rate is open to variation – a rate rise may come as a shock that causes problems or financial stress for you.
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