Fixed VS Variable – which one is best for you?
Fixed VS Variable
So, no doubt this is a question you have asked yourself, especially if you are out there shopping for a home loan. Hopefully the information, that we will provide you with,will help you answer some of the questions that you may have.
Ok, so firstly we are going to take a look at the Variable Rate Home Loan. Variable rate loans are the option you choose when you don’t want to fix your loan and you are happy to have your interest rates move with the changes in the market. This means that the interest rate can rise and fall throughout the period of your home loan. Which means your repayments can change at any time.
Some of the advantages of having a variable rate home loan include:-
- Making extra repayments – these are usually allowed at no extra cost, which means you can save on interest and potentially pay off your home loan sooner.
- It’s easier to switch your home loan – it can sometimes be cheaper and easier to switch your loan if you happen to find a better deal elsewhere.
- There are more features available – variable loans often have other features which include being able to make additional repayments into an offset account which you can redraw on at any time.
- Your home loan repayments fall when interest does – which means this can save you money in the short term.
But there are also a few disadvantages to a variable rate home loan which include:-
- Making budgeting a little harder – it can be more difficult to budget when you are unsure of what the interest rates are doing.
- Mortgage stress – if you are not prepared for the interest rate rise you may find yourself in trouble with the repayments.
- Interest rate rises – if the interest rate does rise you could see yourself paying off a lot more over the course of the loan
Now let’s take a look at a Fixed Rate Home Loan. This loan often has a fixed rate period of anywhere from 1-5 years. At the end of the fixed term the loan will switch back to the variable rate offered by the lender.
Some of the advantages of a fixed rate loan include:-
- Making budgeting easier – this way you know exactly what your repayments will be so you can make plans and set financial budgets with confidence.
- Rate rises will not effect you – if the interest rate does rise above the advertised rate you won’t pay anymore and it’s always a nice feeling knowing that you are paying less!
There are also a few disadvantages to a fixed rate home loan which include:-
- Rate drops not applying to you – you unfortunately will not benefit if the interest rates drop which can leave you paying more than you should.
- Making extra payments can be limited – additional repayments are often limited and any repayments in excess of limits may be charged a fee.
- A redraw facility may not be offered on a fixed rate loan.
- Fees – fixed rate loans can sometimes have, what is called a break fee, if you decide to change or pay off your loan during the fixed rate period.
Another option you have is the Split Rate Home Loan if you are unable to make a decision. This gives you the best of both worlds, especially if you are unsure of which way to go.
A split rate loan means you can split the repayments between fixed and variable. This allows you to manage some of the risk of the interest rates while still being able to make extra repayments. You can split your loan into any ratio that you like to suit your needs and requirements.
Whatever decision you make, it needs to work best for you and your circumstances. You need to take into account your cash flow and also your need for security and stability.
Here at Lime Mortgage Brokers we want to help you, by providing you with valuable information to guide you through the loan process. This is your future and we want to help you make the right decisions.
“Our Knowledge and experience is yours”.
Shawn Swart – Lime Mortgage Brokers