Fixed Vs Variable Rate Home Loans
Fixed Vs Variable Rate Home Loans
Choosing between a fixed or variable rate for your home loan is a critical decision. Each type of interest rate comes with its own set of advantages and considerations. It’s important to understand the differences before deciding.
Fixed Home Loans
A fixed-rate home loan offers a stable interest rate for a predetermined period, typically ranging from one to five years or even longer. During this period, the rate is locked in, providing borrowers with predictability and stability in their repayments.
Pros:
- Certainty: Throughout the fixed term, borrowers benefit from knowing exactly how much their mortgage repayments will be each month, making budgeting easier.
- Protection from Rate Increases: If interest rates rise, borrowers with fixed-rate loans are shielded from higher repayments during the fixed period.
- Planning and Stability: Fixed-rate loans are ideal for borrowers who prefer stability and want to avoid fluctuations in interest rates.
Cons:
- Limited Flexibility: Fixed-rate loans typically have fewer features and less flexibility compared to variable rates.
- Potential Missed Savings: If market interest rates decrease during the fixed period, borrowers may miss out on potential savings.
- Break Costs: Breaking a fixed-rate loan before the end of the fixed period may incur break costs or early termination fees.
Variable Home Loans
Variable-rate home loans can fluctuate over time based on changes in market conditions, such as movements in the official cash rate set by the central bank or other economic factors.
Pros:
- Potential Cost Savings: Variable-rate loans may offer lower initial interest rates compared to fixed-rate loans, resulting in potential cost savings.
- Additional Features: They often come with more features such as offset accounts, redraw facilities, and flexible repayment options. Offset accounts and redraw facilities can also help with potential cost savings by reducing interest expenses
- Ability to Benefit from Rate Decreases: If interest rates drop, borrowers with a variable rate can benefit from potential interest savings, reducing the overall cost of their home loan.
Cons:
- Rate Uncertainty: The interest rate on variable-rate loans can fluctuate, leading to uncertainty about future repayments.
- Budgeting Challenges: Variations in interest rates can make budgeting more challenging as repayments may change over time.
- Exposure to Rate Increases: If interest rates rise, borrowers with variable-rate loans may face higher repayments, affecting affordability.
To summarise, fixed-rate home loans offer rate certainty and repayment stability, while variable-rate home loans generally offer more flexibility to make extra-repayments and often provide additional features.
You should consider your financial goals, risk tolerance, and market conditions when choosing between fixed and variable-rate loans. Consulting with your mortgage broker can help make an informed decision based on your individual circumstances.
To find out more, please feel free to reach out to one of our brokers at Priority Home Loans.