When you are looking to get a home loan one of the biggest decisions you will have to make is whether you want your home loan to be a fixed or variable interest rate. In our opinion, there is no correct answer to this question since it depends on so many different variables. This is why we want to fill you in on the main differences between a fixed interest and a variable interest loan so that when the time comes for you to pick one, you are in the best position to make an informed choice.
Variable Interest Rate
A variable interest rate home loan means that the interest you pay on your loan will fluctuate as the bank changes their interest rates; usually, this is similar to the cash rate set by the Royal Bank of Australia.
This can be good for several reasons:
Opportunity – The benefits of a variable home loan may give you the ability to pay off your home loan faster if you have the ability.
Incentives – Banks understand that variable loans seem scary to their clients, so they provide many benefits to get people to sign up.
Extra payments – Banks usually allow people with variable loans to pay extra payments on their loan whenever they would like and at no extra charge.
There are also some negatives you should be aware of:
Stress – Due to the nature of these loans, many people will feel stressed if they sign up, mainly because of the uncertainty of changing rates.
Interest rises – If something unforeseen happens the interest rates spike could put a hole in your wallet. Therefore, it is important to budget for interest rate rises.
Additional fees – While variable interest rate loans often offer extra services for the borrowers, these services may often come with additional costs.
Fixed Interest Rates
A fixed interest rate loan will mean that the interest you are paying on the money borrowed will be ‘fixed’ to a set rate for an agreed upon period of time. This option has many benefits that make it the option of choice for many borrowers.
Protection – A fixed interest loan will offer you protection from swift market changes, and interest rate rises within the fixed term period.
Simplicity – With a fixed interest rate you know exactly how much you will pay during the period.
There are a few drawbacks to these loans you should be mindful of:
Pay more overall – Since fixed interest rates do not allow you to make extra payments, you may end up paying more overall, compared to a variable interest loan.
Lack of benefits – Unlike variable interest rate loans, fixed interest rate loans come with fewer additional services.
Neither of these options is outright better than the other. It all depends on your personal circumstance and what you think will be best for you. If you would like more advice you should speak to a professional.
Your Guide For Navigating The World Of Home Loans
With a background in banking, finance, business development and project management, there’s no better advocate to have on your team than Nikki Berzin. As a fully qualified mortgage broker and director of Cherry Lending & Finance, Nikki is passionate about all things finance, and empowering her clients with the tools to hit their property goals is what she does best.
If you’re looking to get into your first home, purchase an investment property or even want to look at your options for refinancing, the first step is starting the conversation. Get in touch with Nikki today, or call her directly on 0427 374 155 to bring your mortgage dreams to life.
Disclaimer: We recommend that you seek independent financial and taxation advice before acting on any information in this newsletter. It contains general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. Interest rates are subject to change without notice. Lenders terms, conditions, fees & charges apply.
Credit Representative 499652 is authorised under Australian Credit Licence 389328.