Pros and Cons of Fixed Vs. Variable Home Loan Rates in Australia
Now that you have your eye on your dream home in Australia, the next step, or one of the most important steps, is to take out a mortgage for your home. There are two distinct types of home loan rates in Australia – fixed and variable. But which is the better option? There are pros and cons to each, and it can be a difficult decision to make. So let’s break it down and understand them carefully.
Understanding Fixed Home Loan Rates in Australia
A fixed home loan rate in Australia is a type of mortgage where the interest rate is fixed for a predetermined amount of time, often between one to five years. But in some cases, lenders can extend it up to seven to ten years. This means that regardless of changes to the official cash rate or the lender’s variable interest rates, the borrower will always know exactly how much they must pay each month for the duration of the fixed rate period.
Benefits of Fixed Home Loan Rates in Australia
- Fixed rates make mortgage repayments certain and predictable, making it simpler for borrowers to organise their budgets.
- If interest rates increase, the borrower’s repayment obligation is unaffected.
- Borrowers might feel at ease with fixed rates because they know that their payments won’t change as a result of market fluctuations.
Drawbacks of Fixed Home Loan Rates in Australia
- Fixed-rate loans frequently provide fewer alternatives for additional repayments, redraw facilities or offset accounts, which could restrict a borrower’s ability to pay off the loan more quickly.
- Loans with fixed rates frequently have higher fees and charges than loans with variable rates, which can raise the total cost of borrowing.
- If a borrower chooses to terminate the fixed-rate agreement early, they may be hit with hefty fines.
- If the Reserve Bank of Australia lowers the official cash rate, borrowers with fixed-rate loans may not see the benefit of lower interest rates until their fixed term ends.
Understanding Variable Home Loan Rates in Australia
A loan with variable rates is subject to interest rate changes over the loan’s tenure, either in response to modifications made by the lender or adjustments to the official cash rate set by the Reserve Bank of Australia. This kind of loan can have a 25 or 30-year term.
Benefits of Variable Home Loan Rates in Australia
- Compared to fixed-rate loans, variable home loans typically have lower fees and charges, which can make them more affordable in the short term.
- Variable-rate loans frequently offer greater possibilities for additional repayments, redraw capabilities and offset accounts. This can assist borrowers in paying off their loans more quickly and reducing interest costs.
- If the Reserve Bank of Australia lowers the benchmark interest rate, borrowers with variable-rate loans may experience a decrease in their interest rates, which could result in cheaper repayments.
- Variable-rate loans can be switched to fixed-rate loans if a borrower prefers a fixed repayment schedule.
Drawbacks of Variable Home Loan Rates in Australia
- Borrowers may find it challenging to organise their finances and create a budget for mortgage payments if they have variable-rate loans because of their volatility.
- Borrowers’ finances may be strained if interest rates climb since they would have to make larger repayments.
- Variable home loan rates result in fluctuating repayment amounts, making budgeting challenging.
- If property values decrease and interest rates rise, borrowers with variable-rate loans may face the risk of negative equity, where they owe more on their home loan than the property is worth.
Understanding Which Loan is Best for You
Consider your financial objectives, risk tolerance, and personal circumstances when choosing between fixed and variable home loan rates in Australia. Variable rates provide flexibility and cost savings, while fixed rates provide security and predictable repayments. To make an informed choice, seek counsel from a qualified mortgage broker or financial expert.
At Efficient Capital, we are committed to getting you the best home loan rates in Australia. Our team is run by expert professionals who understand every aspect of your portfolio and personalise solutions that best meet them. Contact us to learn more.