- 2 Mar, 2017

Fixed Rate or Variable Home Loan: Which is Better?

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Choosing between a fixed rate and a variable rate home loan can be a tough decision to make. Of course, no one can predict what will happen to the economy, but some loan features may be safer than others. It pays to do your research, It will depend partly on your own situation. Here is a look at the features of both fixed and variable mortgages.

What are fixed interest rates?

A fixed mortgage rate is just what its name suggests it is fixed. It has no changes. The interest rate and size of your payment are permanent until the mortgage is paid in full. This can be an excellent way to go if you like to know exactly what your payments will be in the future. It can permit you to plan your budget better and enable you to sleep well, especially if money is tight.

This feature can be a very good mortgage type to have when the economy is looking rather unstable and it can go either way. A fixed rate loan is more expensive to start with than a variable loan because lenders are estimating what the future rates will be for the next 30 years, or for the remaining mortgage term if less than that. Naturally, they expect that interest rates and the rate of inflation will be higher in the future than they are now. This type of mortgage may have charges associated with it if you pay it off early.

What are variable interest rates?

Variable rate mortgages are also just what they sound like, the rate changes periodically. The interest rate is usually recalculated yearly, but it may be adjusted more frequently. There is no way to predict whether it will mean an increase or decrease in the size of your payment, but there is the possibility of large increases.

What are the features of variable interest rates?

  • A possible temporary fixed rate
    A variable rate mortgage starts out with a lower interest rate than a fixed rate mortgage. These types of mortgages often have a fixed rate portion in the early years, which could be for a period of 1,2,3,5,7, or 10 years. For the remainder of the loan, the rate will typically change at the start of a new year.
  • Choice of payments
    You will likely have a choice of making payments that include the principle and interest, or just interest only. You may choose to pay the interest only for a period of up to 10 years, but after that, you will need to make payments that are fully amortisable by the end of the loan term. This can be a great option if you plan on selling the property later, or if you believe that your income will be better at a later time.
  • Options
    If you like to have options, then a variable rate mortgage will definitely give you more of what you are looking for. For one thing, most lenders will permit you to make additional payments at any time. Doing this often can enable you to significantly reduce the interest on your home loan and pay it off early. Two more options include offset accounts and redraw. Linked accounts enable you to have money in a separate account that can be used to pay off your mortgage early. Redraw lets you re-borrow money that you have already paid in advance if you should need it. You can even borrow it and then borrow it again later if you choose.
  • Split loans
    Most Australian banks will let you split your mortgage loan into more than one type of loan. You might take part of it, for instance, and turn it into a fixed loan, which will help reduce the effect of any sudden market changes and higher interest rates.

Which option is best for me?

Whether you decide to go one of the major lenders, like the Commonwealth Bank, ANZ, or NAB, be aware that interest rates offered are usually not the same, and there are often other factors that determine the actual interest rate your receive.

Both types of loans, fixed rate and variable rate mortgages, have their own advantages. It pays to research what home loans are on offer , to determine which type of loan is best for your situation.

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