When purchasing a property or doing a refinance, you need to decide between a fixed-rate loan that maintains the same interest rate over a specific period of time or a variable-rate loan that charges interest rate according to market fluctuations. Each of the options has advantages and disadvantages.
A fixed rate loan usually comes with a few advantages:
- Budgeting – you know the exact repayment amount during the term of the loan so that you can plan ahead and set your financial goals with confidence.
- Interest rate rises – if the interest rate rises above your fixed rate, you will be better off paying less interest rate than the variable rate.
Some of the disadvantages are:
- Interest rate drops –you won’t benefit from a drop in interest rates if you fixed rate is more than a variable rate.
- Extra repayment – you will normally lose the flexibility due to limited extra payments.
- Exit/Break fees—you may encounter a hefty break fee if you change or pay off your loan within the fixed rate period.
- Redraw or offset facility – a redraw and offset facility may not be offered.
The advantage of a variable rate loan may include:
- Extra repayment – you normally make extra repayments at no extra cost, which may help you pay off your loan sooner and save you interest payments.
- Redraw or offset facility –you often have attractive features.
- Switch loans—you may switch to different loan product at a cheaper cost if you find a better deal.
The disadvantage of a variable rate loan may include:
- Budgeting—it can be difficult in terms of budget, as the interest rate can fluctuate over time.
- Mortgage stress—if you aren’t prepared for a rate rise, you may have a trouble of meeting the repayment increase.
Is there another option?
The Split loan is the answer. You can make a bet both ways by having a partial fixed and partial variable interest loans. There is generally no limit on the ratio of the split of the loan.
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4 responses to “Fixed or variable home loans? Which one is right for you?”
can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features you really need. it is very important to not only check the right.
Exactly, to get your tailored mortgage solutions cannot be judged based on general right or wrong, it is based on your personal situation. Mortgage broker will analyse customers’ needs and financial status to provide a comprehensive solution strategy.
I like that you point out how a fixed interest home loan gives you benefits of always knowing what you need to pay and budget for. My sister is looking to buy a home but will need to take out a loan in order to make that happen. I think I will talk to her about finding a fixed rate so she can budget better.
Thank you Kyle for your comment. That’s a good point you caught. Currently some banks offers really competitive fix rates for promotion. I believe your sister will benefit from more useful information which she can learn from a free consultation with VIP MORTGAGE SOLUTIONS lending specialists. Feel free to contact us.