When choosing between a fixed interest rate or variable rate loans, there are different things to consider before making your decision.
While a fixed rate loan offers stability, a variable rate home loan comes with features that may be useful. You will need to take a close look at your personal financial situation, as well as your future financial goals in order to make a suitable choice.
Follow our comprehensive guide to understand the main differences between the two loan types, and make an informed decision to benefit your home loan
How Does a Home Loan With a Fixed Interest Rate Work?
If you take out a home loan with a fixed interest rate, the interest rates on the day of signing will remain your interest rate for the entirety of the home loan term your fixed rate was approved for.
Regardless of whether the interest rate rises or falls during that time, your home loan interest will be locked in.
There are two main reasons why people opt for a fixed interest rate home loan:
- Fixed interest rates provide a sense of stability. With a fixed rate mortgage, you know that the amount of money you have to pay for your loan repayments will remain constant, month in and month out. Therefore, it’s much easier to prepare and budget.
- There’s always the risk of potential interest rate rises. But, if the cash rate goes up, a mortgage with a fixed rate won’t be affected. So, the person with the fixed interest rate will save money compared to the person with the variable interest rate.
Of course, the opposite also applies: if the interest rates fall, you’ll still have to pay your fixed rate regardless. Therefore, it’s worth establishing when markets are low and choosing a fixed rate home loan then.
How Does a Home Loan With a Variable Interest Rate Work?
A home loan with a variable interest rate can be riskier. If markets go up, so will your home loan interest rates – and vice versa.
So, before choosing a variable rate mortgage, you should consider whether you’ll be able to manage the increased volatility in interest rates.
What makes variable interest rate home loans attractive to most borrowers is that they generally come with additional features.
An offset account is a feature available with variable rate loans. It acts as an everyday transactional account linked to your home loan, so you can easily swipe or withdraw funds.
Offset accounts can be used as savings accounts and the balance is offset against how much you still owe on your home loan.
For example, if your home loan is for $500,000 and you deposit $20,000 into your offset account, you’ll only be charged interest on the remaining $480,000.
Thus to pay less interest on your home loan, you should try and keep as much money as possible in your offset account.
Another feature available with a variable home loan is a redraw facility.
With an account linked to your home loan, borrowers can use this feature to make additional repayments into your mortgage. In turn, this will mean you pay off your home loan sooner and save you money on interest in the process.
Those extra repayments can be withdrawn if needed, but at times it may cost you.
How Do You Choose Between the Types of Loan Products?
There are pros and cons to each of the loan products attached to home loans, so it’s crucial to consider those before choosing which will best suit you.
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What if You Can’t Decide Between a Variable and a Fixed Rate Loan?
Another option to consider is doing a bit of both with a split home loan.
With fixed rate loans, your loan is fixed for the period agreed on, and after that, it rolls over to variable interest rates.
With a split loan, you could choose a home loan with a fixed rate and a variable interest rate so you can get the better of both worlds.
How The Mortgage Agency Can Help
When it comes to home loans, getting started is always the most challenging part.
At The Mortgage Agency, we’ll guide you and be there every step of the application process. We focus on the nitty-gritty so that you don’t have to.
Our mortgage brokers will suggest the best suitable lenders to meet your needs and negotiate the best interest rates and deals to suit your budget.
Then we will regularly keep track to ensure your goals are still on the right path.
Fixed rate loans are a great choice when interest rates are low. With fixed rates, you’ll be paying fixed repayments of the same amount for your entire home loan term.
While variable rate home loans are more volatile, they come with attractive features that can save you money in the long run, should you make any extra loan repayments.
Both fixed and variable rate home loans come with their advantages and disadvantages. Which one you choose will be dependent on your personal circumstances and your financial circumstances.
When you’re ready to make your choice, contact us, and our mortgage brokers will make your home loan process as stress-free and convenient as possible.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.