Fixed or Variable Rate Loan?
Get pre-approved for a Home Loan
If you are planning to buy a home you have probably started researching the various types of mortgage loans available. The two most common types of mortgage loans are fixed rate loans and variable rate loans. Variable rate loans are the most common in Australia but there is considerable interest in fixed loans now that rates are increasing again. Try our Variable vs Fixed Rate Mortgage Calculator to compare costs between the two types.
Fixed Rate Loans
A fixed rate mortgage loan applies the same interest rate over the entire life of the loan. The benefits of a fixed rate loan are that the interest rate, monthly payment as it applies to the principal and interest stay the same until the loan is paid off. This type of loan can provide stability without concern for changing interest rates. Obviously, the major disadvantage of this type of loan is that if for instance the fixed rate is 7% for 15 years and the interest rates drop to 6% the loan is still locked into 7% and the mortgagee cannot take advantage of lower payments which would result from the lower interest rate. Fixed rate loans usually have higher payments than variable rate payments for loans taken out at the same time. This can obviously change over time.
Variable Rate Loans
A variable or adjustable rate loan is a flexible rate mortgage with a rate that varies in accordance with the financial index it is based on. This is the most popular loan type in Australia because of the low fees, flexibility and moderate interest rates. Throughout the life of the loan the home buyer’s interest rates will adjust. For example, a homeowner could take out a variable interest loan at an initial interest rate of 6%. During an adjustment period, the market could raise the interest rates to 8% resulting in a higher payment. The opposite could also occur resulting in a lower payment.
One of the most attractive advantages of the variable rate loan is the initial lower beginning interest rates. This makes this an attractive alternative for someone who does not plan to stay in a home for a long period of time or the buyer wants to make accelerated payments on the loan. This is significant because variable loan rates adjust on the current loan balance at the adjustment period.
Which is loan type is right for you - a fixed rate or variable rate loan. This is a question you should discuss with your mortgage professional but the simple answer is this. If you are concerned about being able to afford repayments when rates rise a fixed rate loan is probably the best option for you. If you plan to stay in your home less than four years, or can comfortably meet increased repayments then a variable rate loan might be your best choice.
Recent history in Australia has demonstrated that variable rate loans have proven cheaper than fixed for most of the last 20 years.
If you are thinking about buying a house then it pays to research all the types of loans available, discuss your options with a mortgage professional, and get finance pre-approved.
Financial Services Online is an emerging online exchange that connects interested consumers to various professional mortgage services companies in its Australia wide network. Fill out the online form for a free no-obligation quote and see what they can suggest for your situation.
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