You’ve got your heart set on the house of your dreams and you couldn’t be happier. Still, in order to actually make it your house, you require financing. Which brings us to the question: which type of financing should you get? Fixed or variable? Similar to most financial decisions, there are pitfalls and advantages linked to each alternative. Therefore, today we will outline a comparison between the two to help you make a choice.
A fixed home loan is a mortgage whose interest rate remains unchanged for a given timeframe. At the end of that timeframe, you can either pick a new fixed interest period or reverse the loan to a variable interest rate.
That being said, what are the advantages of choosing this type of loan?
- The interest rate growth won’t affect you. If the interest rates increase above the fixed rate, you’ll still pay the same interest rate than others would on a variable home loan.
- Budgeting. Since you know the sum of money that goes into making repayments, this will make it easier for you to budget and organise your finances.
On the other hand, what pitfalls should you be aware of?
- Lack of flexibility. Traditionally, fixed home loans are characterised by inflexibility. Lenders might have limitations regarding the number of additional repayments you can make if you have the option of doing that.
- You won’t have access to a redraw facility. A redraw facility offers access to extra money that you have deposited into the home loan. For the most part, fixed interest rate loans don’t offer a redraw facility.
- Break costs. If you decide to break out of a fixed home loan before the designated timeframe, you’ll cope with major costs. This is likely to happen especially if you refinance over to another lender or sell the home during the fixed rate term.
- You won’t benefit from interest rate drops.
As the name already implies, the interest rate on a variable home loan can rise or drop with official interest rates. They are definitely more flexible, and they are more affordable, considering a number of fees one is expected to pay. In February 2013, 86.5 percent of the totals of mortgages in Australia were variable home loans. This indicates they are more popular than their counterparts.
Here are the advantages:
- More flexibility and features. The best thing about variable home loans is that they supply flexibility and other convenient features. For instance, you can save money on interest by using an offset account. You can also take advantage of unlimited redraws in the case of additional repayments.
- You have the option of making extra repayments. For the most part, if you have a variable home loan, you have the option of making extra repayments if your situation allows you to do to so, at no extra costs.
- You can switch loans easily. If you find another loan deal, you can easily switch and change the loan terms, without much difficulty.
What about the pitfalls?
- Mortgage stress. If you aren’t financially prepared for interest rate rises, that will make it a challenge to cope with making timely repayments.
- Difficult to budget. Since you cannot anticipate how the interest rate is expected to drop or rise, budgeting and organising your finances won’t be the easiest thing to do.
There’s no solution that would fit the financial situation of every Australian. Therefore, you should choose a loan whose features work for you, because, at the end of the day, this is the most important thing.