Home ownership is a dream for almost all Australians and getting the right type of mortgage is very important because the home loan will be the biggest financial commitment they’ll ever make and, with so many options available, choosing the right one can feel daunting.
One of the biggest considerations when getting a home loan is whether to get a fixed rate loan or a variable one.
Here are a few pros & cons of fixed rate home loan
PROS
- Freedom: With variable rate home loan you have the freedom to refinance to another bank more convenient for you.
- Better Loan Features: Variable rate home loan comes with Offset/redraw account which can be used to deposit more funds and reduce your interest repayments and withdraw funds when needed.
- Take Advantage of Rate Drop: With variable rate home loan, your interest rate is not locked so when the interest rate goes down so will your interest rate and your monthly repayments.
CONS
- Security & Stability: With variable rate your interest rate could go up and down on monthly basis lacking stability and rate security.
- Rate Increase: Interest rate increase by the RBA will impact your interest rate too resulting in higher monthly repayments.
- Peace of Mind & Budgeting Problems: With variable rate home loans your monthly repayment are not certain and could change on a monthly basis and you might have to make changes to your budget as a result of interest rate change.
Here are a few pros & cons of fixed rate home loan
PROS
- Stability & Consistency: With a fixed rate home loan, you get stability and consistency. No matter what happens in the market, your loan repayment will remain the same during the fixed rate period usually (1-5years).
- Set & Forget: Once you lock in to a fixed rate home loan, everything stays the same and the predictability makes this type of loan more attractive.
- Easier To Budget: Home Owners will find it easier to budget with fixed rate loan.
CONS
- Rate Cut Not Applicable: If you have fixed your interest rate, you will not be able to to benefit from any future rate drop until the end of your fixed rate term.
- Home Loan Features Fixed Too: Many of the useful features that are available to variable rate holders are not available to fixed rate holders such as redraw account or link an offset account to their loan.
- Higher Interest Rate: Fixed rate home loans are usually higher than variable rate home loans.
The content on this site is for informational and educational purposes only and is not intended as a substitute for professional credit or financial advice. Always consult with a licensed financial advisor/finance & mortgage professional before making any decisions based on the information you read on this blog.