When taking out a home loan, one of the biggest decisions you will make is whether you opt for a fixed rate loan or a variable rate loan. So, which one is more suitable? Each option comes with uniquely attractive benefits and limitations. Deciding which one is right for you will largely depend on your personal circumstances and your financial goals. Do you prefer to have a predictable level of repayments, or would you prefer flexibility in the payment amount?
Let us walk you through the pros and cons of each, so that you may have a better understanding on which may be most suitable for you.
Pros and Cons of a Fixed Rate Loan
The beauty of a fixed rate loan lies in its predictability. When you have a fixed rate loan, you’ll know exactly how much you’re going to pay every month. This allows you to have better control over your budget – at least during the fixed rate period.
Fixed rate loans last only for a certain period, usually from 1 – 5 years. After that, the loan will revert to a variable rate loan. Prior to the fixed rate expiring, you should meet with your mortgage broker to review your home loan to ensure the loan is still suitable to your needs. In the current competitive market, you could be able to negotiate a lower variable interest rate than the one your current loan will automatically change to.
Fixed rate loans also lack the flexibility and features that are found in a variable rate loan. For example, lenders have restrictions on how much extra you can pay off within the fixed rate period. If your loan permits higher repayments, then there may be limitations on whether you can redraw the extra cash at a later date. Some lenders may also penalise you if you make overpayments, a feature that comes free with a variable rate loan.
Pros and Cons of a Variable Rate Loan
As the name would suggest, a variable rate loan is where the interest rate changes depending on the movement of the rates in the market. A fluctuating rate is great if they’re going down, but not if they’re going up.
Variable rate loan interest rates are usually lower than a fixed rate loan making them seem more appealing, however in this current market there is more to think about with a variable rate loan, for example, if there is a future rate cut, where will your variable rate loan sit compared to other loan options? Also, variable rate loans come with features such as a redraw facility, and unlimited level of repayments every month. These enable you to pay off more of your loan if you’re able to do so, or withdraw some of those extra payments when you need them for something else.
Split Home Loan: The Best of Both Worlds
Not everything has to be black and white, however. If you want to get the best of both fixed rate and variable rate loans, then there’s the split home loan. This is where you can set up two loans for your mortgage, one portion is set up under a variable rate and the remaining is set at a fixed rate for a certain amount of time. This provides you the flexibility of making larger repayments towards the variable rate loan, whilst also taking advantage of the fixed rates in case interest rates start to rise.
It is important to remember that what suits one person, may not suit another as everyone’s financial and personal circumstances differ. It is advisable to seek professional advice from a mortgage broker before making a decision. Your mortgage broker will ask the right questions to work out what you can afford to ensure you are in a secure financial position throughout the life of the loan.
If you would like to know more about these types of loans, or need help in taking out a home loan, please send me an enquiry today or give me a call on (08) 9367 4222.
Written by Cale Walsh.