When it comes to buying a home, one of the most important decisions you’ll make is choosing the right type of mortgage. With so many options available, it can be overwhelming trying to navigate the different terms and conditions. In this post, we’ll take a look at the two most common types of mortgages and help you determine which one is best for you.

First, let’s define exactly what a mortgage is. A mortgage is a loan that’s used to purchase a property. The property is used as collateral for the loan, and the lender holds the title on the property until the loan is paid off.

In Australia, there are two common types of mortgages: fixed-rate and variable. Each comes with pros and cons, and while it’s possible to negotiate with your lender to move from one type to the other, it’s important to understand which type of mortgage is right for you.

Fixed-Rate Mortgages

A fixed-rate mortgage is just what it sounds like—a mortgage with an interest rate that remains the same for the duration of the loan term. The most common term length for a fixed-rate mortgage in Australia is 25 years, but terms can be as short as 12 months or as long as 30 years. In addition to offering stability, fixed-rate mortgages allow you to budget more accurately since your repayments will stay consistent over time.

Pros & Cons of Fixed-Rate Mortgages

The biggest benefit of a fixed-rate mortgage is that it provides borrowers with some protection against rising interest rates. If you take out a 25-year loan when interest rates are at their lowest point, and then rates start to climb, you won’t have to worry about your monthly payments increasing—they’ll remain constant for the life of the loan thanks to your fixed rate.

On the other hand, if interest rates drop after you’ve taken out your loan, you won’t be able to take advantage of those lower rates either since they won’t apply to your existing loan payments. Additionally, if you decide that you want to make extra payments on your principal balance (which can save you thousands in interest over time), some lenders may charge additional fees.

Fixed-rate mortgages offer plenty of benefits for Australian home buyers looking for some stability and protection against rising interest rates. However, it’s important to understand both the pros and cons before deciding which type of loan is right for you.

Variable-rate Mortgages

A variable-rate mortgage (VRM) differs from a fixed-rate mortgage because the interest rate changes over time depending on the current market rates. This means that your monthly payments may go up or down each month based on the current rates set by your lender. Because these rates tend to fluctuate, it can be harder to predict how much you’ll end up paying each month or year.

Pros And Cons Of Variable-Rate Mortgages

The main advantage of taking out a VRM is that they usually have lower interest rates than fixed mortgages. This means your monthly payments will be lower when compared to other types of loans, making them more affordable in the short term. However, if market rates increase significantly over time – as they often do – then your monthly payments could become significantly higher.

Another potential benefit of VRMs is that they offer more flexibility than other types of mortgages. For example, some lenders offer redraw facilities that allow you to access extra money if needed without having to pay additional fees or charges. This can make it easier to manage your finances by giving you access to extra funds should an emergency arise or if you decide to make additional repayments on your loan.

Finally, VRMs also offer borrowers the chance to take advantage of falling interest rates if they happen during the life of their loan. If market rates drop, then you could end up saving thousands on your loan over its duration – something that isn’t possible with other types of mortgages where the interest rate remains constant throughout its term.

While variable-rate mortgages can be beneficial for Australian home buyers who are looking for greater flexibility and lower interest rates in comparison with other types of loans, it’s important to understand this type of loan comes with some risks due to potentially fluctuating market conditions and should therefore only be considered after careful research has been done.

When deciding which type of mortgage is right for you, you must consider your financial situation and goals. If you prefer a consistent monthly payment, a fixed-rate mortgage may be the best option. However, if you’re willing to take on the risk of fluctuating monthly payments in exchange for the potential for lower interest rates, a VRM mortgage may be the way to go. Here, at Grow Financial Solutions, we’re committed to making this all as simple as possible and can talk you through your options and secure the best loan for your needs. Getting started with a mortgage application begins with a phone call, so get in touch today; we’d love to help.