Being thorough with how you approach mortgages can help both your short-term and long-term finances. This is doubly true when you consider the recent interest rate hikes. Given this, you’ll want to make sure to explore all your options before committing to anything. When it comes to home loans, one of the major decisions you need to make is to decide between fixed and variable rate home loans. Now, we understand if this may seem complicated. To help make things more manageable, we thought it would be useful to put together a brief article on this subject. If this is something that you’re interested in learning more about, read on as we break down what you need to know about fixed and variable rate home loans.
What’s the Difference between Fixed and Variable Rates?
A variable-rate mortgage allows you to make extra repayments, thereby offsetting the interest costs with the added flexibility of being able to take out money any time you want. And because of that extra payment, you’ll reduce your loan amount, pay off the mortgage faster, and save thousands in interest costs.
Now, it's important to keep in mind that there are also downsides attached to variable rates. If official interest rates increase, you will pay more for your mortgage. As a consequence, you might be subjected to significant stress from the increase in your monthly mortgage payments. On top of this, the payments depend on fluctuating interest rates, which might negatively affect how you budget your monthly household expenses.
What Are the Advantages and Disadvantages of Fixed Rates?
Fixed rates make it easier to plan. Knowing exactly how much you will have to pay for an established period of time is a key factor in being able to stick to your budget. While the interest rate on variable loans fluctuates with the economy, a fixed loan enables you to budget for your repayment amount. These loans will also protect you from unexpected highs. The stability of a fixed rate is beneficial if you need to avoid paying higher rates if the official interest rate significantly increases during the fixed term. Lastly, it provides peace of mind. Think about it; once you know how much you will be paying for an established period, you won’t have to constantly stress about repaying your loan.
Your repayments will not change whether or not the official cash rate goes up or down, even if the variable rate is better for you. In some cases, you may be better off with a variable rate depending on your situation. You will miss out on reaping the benefits from the variable rate if interest rates go down. If you decide to switch to a new loan before the end of your fixed term, you will get a fee for breaking your contract.
Conclusion
We hope this article proves to be useful when it comes to furthering your understanding of fixed and variable rate home loans. As you can see, there is no one best option, and you’ll want to assess your financial situation in order to make the best possible decision regarding your home loans. Feel free to refer back to this article if you need more guidance on this subject. For more specific questions, reach out to mortgage professionals.
Wealthy You is an Australian mortgage company that can offer you a variety of the best home loans in Sydney. Our team also comprises professionals who have been in the industry for almost a decade. If you want to know more, contact us for an obligation-free meeting!
