Fixed loans Vs Variable loans: Knowing what to choose the right one for you
There is no way you can see into the future and predict whether you will be better or worse off with fixed loans or variable loans, because no-one knows what will happen with the economy and interest rates.
However you can make an educated guess based upon your situation and future plans as to whether a variable or fixed loans interest rate is right for you.
A Variable loans interest rate is:
An interest rate charged on your loan that varies as the market fluctuates.
A Fixed loans interest rate is:
A loan where the rate of interest or fee’s you are charged for the term of the loan remains at a fixed rate.
This allows the borrower to predict future repayments no matter what interest rates do.
Generally if interest rates are low but could increase it would probably be better to lock the loan in with a fixed interest rate.
If interest rates are lowering then it would be better to have a variable interest rate, because as the variable interest rates fall, so too will your loan interest rate.
Fixed loans rates protect borrowers from sudden increases in mortgage repayments, they are easy to understand and they are basically the same with most lenders.
The other side of fixed loans rates is when interest rates are high, qualifying for a loan is harder because the repayments are larger.
Fixed loans rates are usually between 15-30 year terms, with smaller monthly interest rates. However this leaves the consumer paying a much greater amount of interest because it takes them longer to pay off the principle amount of their loan within the 30 year term.
Shorter term mortgages cost a lot less overall.
Variable loans rates are much more complex than fixed loans rates because there are many factors that can cause your rate to fluctuate most of them out of your control.
Some find them appealing because they offer lower initial payments. However your monthly interest rate can change significantly and are often structured to double within a few years.
You need to decide which is the right interest rate for your situation.
Some questions you should be asking yourself are:
- Do you have a large mortgage payment?
- Can you afford to repay the mortgage as well as interest?
- What if interest rates rise? Will you still be able to afford your mortgage?
- Is this your forever home or will you likely move within the foreseeable future?
- Are interest rates on the way up or down?
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What are the Pro’s and the Con’s of Fixed loans and Variable loans rates?
Variable loans rates
- Makes budgeting harder
- Mortgage stress if the rates rise and you are unprepared.
- Mortgage fluctuates each month
- You can make extra repayments whenever you like
- It offers more features like, unlimited redraws, savings on interest with offset accounts.
- Easier to switch loans if your situation changes.
Fixed loans rates
- Rate drops won’t apply to you
- Limits on extra repayments – additional payments are often not allowed or capped at a low amount or you could be charged a fee.
- A redraw facility may not be offered on a fixed rate home loan.
- You may be charged break fee’s on fixed loans rates if you change or payoff your home loan within the fixed rate period.
- Fixed loans rates make budgeting very easy and allows consumers to plan ahead.
- Rate rises won’t affect you.
How do I decide on the best home loan rates for my family?
If you are still feeling unsure what whether fixed loans or variable loans are right for your needs then maybe it is time to consult a mortgage broker. They can give you plenty advise on who has the best interest rates for fixed loans and variable loans and they can do all the shopping around for you!
However ensure you get a written quote or contract that outlines their fee’s as many mortgage brokers fee’s will often be wrapped up in your new home loan, which isn’t a problem but being aware that they are being paid by the lender for referring your business.