With all the latest cash rate hikes by the RBA, many buyers and existing mortgage holders are asking themselves whether now is a good time to fix their interest rates.
A fixed interest rate is an interest rate that does not change over the life of the loan during the fixed period term. The borrower pays the same amount of interest throughout the loan term.
A variable interest rate, on the other hand, is an interest rate that can fluctuate over the life of the loan, depending on market conditions. The borrower pays different amounts of interest at different points in the loan term, depending on the prevailing rate.
Let's take a look at the benefits of each of these loan options.
Benefits of a variable interest rate loan
Flexibility One of the main advantages of a variable rate home loan is the flexibility it provides. This is because borrowers have the ability to make additional repayments, redraw funds, and even delay payments without incurring any penalties.
Lower Interest Rates Variable rate home loans often come with lower interest rates than fixed rate loans. This means that borrowers can save money on the total cost of their loan over the course of its lifetime.
Easier To Set Up Variable rate home loans are generally easier to set up than fixed rate loans. This is because there is no need for the borrower to lock in an interest rate for a certain period of time, meaning the process can be completed much faster.
More Options Variable rate home loans also offer more options for borrowers. This includes the ability to switch to different loan products, such as an offset account, which can result in even greater savings.
Easier To Refinance Borrowers can easily refinance their variable rate home loan if they find a better deal on the market. This is because they are not tied down to a fixed rate, meaning they can take advantage of any changes in interest rates.
Benefits of a fixed interest rate loan
Fixed Rate Security A fixed home loan provides the security of knowing that your payments and interest rate will not change during the term of the loan. This can help you budget and plan your finances with confidence.
Stability A fixed interest rate can help borrowers avoid the risk of fluctuating rates. With a fixed rate, your monthly payments will remain the same, whereas a variable rate may go up or down, depending on market conditions.
Rate Lock A fixed home loan can provide a rate lock even before you a buy a property, meaning you can lock in the current interest rate and repayment amount for the specified loan term period.
Flexibility Most fixed home loans offer flexible repayment options, such as the ability to make additional repayments or redraw funds at any time (to a certain limit).
Ultimately, the decision of whether to choose a variable or fixed interest rate will depend on your individual situation and risk tolerance.
If you are looking for a lower rate in the short-term, a variable rate may be a good option. If you are looking for a rate that will remain the same over the life of the loan, a fixed rate may be a better option. Consider your individual needs and the current market conditions to decide which type of interest rate will work best for you.
Disclosure: The information contained in this blog is our personal opinion only and is not to be taken as financial advice, as we do not know your financial situation. Please speak with your accountant or any other licensed professional for specific advice based on your own personal circumstances. We will not be held liable for any losses.
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