Should I go fixed or variable with my home loan?
Crunching the numbers to see what will work best with your financial situation can be tough for those who aren’t familiar with the housing and financial markets. Most Sydney homeowners have come across the terms fixed and variable as options for a home loan, but how do they work out which one will work best for them?
What’s the difference between fixed and variable?
A fixed loan has a fixed interest rate attached to it. What this means is that the interest rate will remain stable for the specified term, with most term options sitting somewhere in the range of one, two, or three years. Once the term has expired the loan will then switch over to the lender’s current variable rate.
On the other hand variable loans do not have a fixed interest rate attached to them, which means that the interest rate will change according to movements in the market.” As a result, you will be paying varying rates of interest over the term of the loan, which will also affect the repayment amount you will be required to repay each month.
Advantages and disadvantages of a fixed home loan
Fixed home loans have their main advantage in that they allow you to budget more accurately from month to month because your repayments remain stable for the term of a fixed rate.
However, there are disadvantages to a fixed home loan of which homeowners need to be aware. To break out of a fixed loan contract can be a costly and challenging affair. Fixed loans may also have fees attached, and they may even come with penalties should the homeowner want to increase their repayments or pay off the mortgage early.
And obviously, should the market interest rate drop to less than your fixed rate, you will be prevented from taking advantage of the lower interest rates.
Advantages and disadvantages of a variable home loan
When considering a variable rate you should know that their main strength lies in their flexibility. You must meet your monthly repayment obligations, but a variable rate loan also affords you the option to pay off extra and get you free of the mortgage faster, while also paying less overall interest.
Variable rate loans also have many more features, such as unlimited redraws on your additional repayments, and the option of an offset account, which save a homeowner many thousands of dollars over the life of the loan.
Additionally, variable rates aren’t without their disadvantages. The biggest drawback to consider is the fact that interest rates can rise or fall at any time. It’s great when you are paying low-interest rates, but if they rise unexpectedly, the budget can be stretched a little thin as homeowners struggle to make up the difference.
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