Buying a home is a significant milestone in your life, and deciding how to finance it is equally important. When it comes to home loans, you typically have two main options: fixed rate loans and variable rate loans. Each option has its own set of advantages and disadvantages, and understanding them is key to making an informed decision. Let’s dive into the world of home loans and understand the pros and cons of each.
What are Fixed and Variable Rate Home Loans?
Before focussing on the pros and cons, it’s crucial to understand what’s meant by fixed and variable rate home loans.
Fixed Rate Home Loans
A fixed rate home loan is a loan where the interest rate remains the same for a set period of time – usually between one and five years. Regardless of what happens in the market and any rate changes announced by the RBA, your interest rate—and, therefore, your repayment—remains constant during this period.
Variable Rate Home Loans
On the other hand, a variable rate home loan has an interest rate that can change over time and moves with the market. The rate is linked to the official cash rate, so if the Reserve Bank of Australia changes the cash rate, your interest rate wii lost likely change too.
Pros and Cons of Fixed Rate Home Loans
When weighing up options to make a decision, there will always be advantages and disadvantages. Here are the implications of choosing a fixed rate home loan.
The Pros
Budgeting Made Easy
The main advantage of a fixed rate home loan is the certainty it provides. No nasty surprises. Because your repayment amount remains the same for the fixed period, it’s easier to budget and plan your finances.
Protection Against Rate Rises
If interest rates rise, you’re protected. Your rate stays the same, and so do your repayments. In a time of increasing rates, this can be a significant advantage.
The Cons
Missed Opportunity If Rates Fall
While a fixed rate home loan protects you from rate rises, it also means you can’t take advantage of falling rates. If rates decrease, you’ll be stuck paying a higher rate until your fixed term ends.
Limited Flexibility
Fixed rate loans often have less flexibility. They may not allow for additional repayments, or they may charge you a fee if you want to pay off your loan early.
Pros and Cons of Variable Rate Home Loans
Let’s now consider the pros and cons of variable rate home loans.
The Pros
Greater Flexibility
Variable rate loans typically offer more flexibility than fixed rate loans. You usually can make additional repayments, redraw excess funds, or even pay off your loan early without any penalties.
Opportunity to Save If Rates Fall
If interest rates fall, your interest rate will most likely fall too. This can save you money on your repayments and help you pay off your loan sooner.
The Cons
Uncertainty
The main downside of a variable rate loan is the uncertainty. If rates rise, your repayments will increase too. This can make budgeting more challenging and could put financial strain on you if rates rise significantly.
Potential for Higher Costs
If interest rates increase, you could end up paying more interest over the life of your loan compared to a fixed rate loan.
The Final Decision
Deciding between a fixed and variable rate home loan isn’t a one-size-fits-all decision. It depends on your personal circumstances, financial situation, and risk tolerance. You could also consider a split loan, which allows you to have a portion of your loan on a fixed rate and the rest on a variable rate, giving you a mix of stability and flexibility.
Speaking with Grow Financial Solutions can help clarify these options and guide you to the right decision. We’ve access to as wide range of lenders and loan products and will work with you to present only the best options to help make your choice easier. Call us today, we’d love to assist you!