Making the life changing decision to buy a home is an exciting venture. To ensure the decision is a fruitful asset for years to come, it’s important you understand how home loans work and make a well-informed decision on which home loan is best for your situation. Choosing between a fixed and variable rate home loan can be difficult, and your decision must weigh up against your personal circumstances and market trends. The volatile nature of the market poses great difficulty in predicting which home loan will serve you best now and in the future. There are several advantages and disadvantages to both, and it pays to consider how each home loan will affect your financial status and wellbeing.
While finding the best home loan rates is quintessential, consideration to the rise and fall of rates and how it will affect you, can have a major impact on budgeting and repayments.
Recent market trends have seen a rise in variable home loans, however despite this, Australian home buyers still favour fixed home loans. Industry professionals have predicted that interest rates will sky rocket in the coming years, creating a fear amongst home buyers. This fear encourages fixed rate home loans; however, the recent rate cuts are increasing the popularity of variable rates.
Tossing up between the flexibility of a variable loan and the stability of a fixed loan isn’t an easy choice. Mortgage Domayne has identified the pros and cons of each to aid in the decision-making process.
Fixed rate: Pros and Cons
– Budgeting and financial goals: Choosing a fixed home loan means repayments will be the same each time. This allows homeowners to budget, set financial goals, and make plans for the future.
– Interest rate protection: If home loan rates do sky rocket, your repayment scheme will not be affected.
– Additional repayments limited: Most lenders have a limit on the additional repayments that can be made on a home loan, and will charge additional fees for repayments made over the threshold. Furthermore, additional payments cannot be redrawn.
– Rate cuts won’t apply: When rates drop, your repayments will remain the same and you won’t benefit from favourable market trends.
– Break fee: You will incur a break fee if you pay off or alter your loan within the fixed rate period.
Variable rate: Pros and Cons
– Additional Repayments: Home owners can take full advantage of low rates by making additional repayments during that period. This comes at no extra cost and can lead to paying your loan off faster and more affordably.
– Flexibility: Features of a variable rate are generally more appealing. They often feature unlimited redraws on additional repayments, the ability to save on interest through offset accounts, and are interchangeable if a better deal arises.
– Budgeting restrictions: Budgeting can become difficult with variable home loan rates, and interest rates could rise at any time meaning your repayments would increase.
– Financial planning: It’s often hard to set financial goals as there is less continuity in variable home loan repayments.
Can’t decide whether a fixed or variable rate will be most beneficial to you? There is the option of splitting your loan to incorporate both rates.
There’s a lot to consider when choosing the right home loan. To start the home loan process and learn more about which loan will work best for you, contact the knowledgeable team at Mortgage Domayne. We’ll endeavour to find you the cheapest home loan rates and develop the most suitable repayment strategy.