If you’re looking to finance the purchase of a new home one of the questions on your mind may be Should I get a fixed rate or variable rate home loan plan?
The truth is there’s no easy answer as both options have their pros and cons. The best course of action is to read up on the features of both types of home loans and make an informed decision about which one is best for you.
The pros of fixed rate home loans
Fixed rate home loan plans are just that, they offer a fixed interest rate on your mortgage loan for a predetermined time period such as 1, 3 or 5 years.
Stability is a major benefit of fixed rate loans. You will have consistent monthly mortgage payments and your payments will be completely unaffected by interest rate hikes because your rate is locked in. This is the ideal product for homeowners who want take advantage of (a.k.a. lock in) the current low interest rates and who expect to keep their home for the long term.
According to Australia’s Securities & Investments Commission the exact same pros mentioned above are also cons when it comes to fixed rate loans. In exchange for the stability the monthly payments are usually higher than variable rate mortgages and because the rate is fixed homeowners can’t take advantage of any interest rate drops.
If a homeowner has a fixed rate mortgage and they want to break the interest term (because they sold the home) their lender will most likely charge them a penalty. This is definitely a disadvantage of fixed rate home loan plans.
The pros of variable rate home loan plans
Variable rate home loan plans are almost the exact opposite. It’s a flexible product with a variable interest rate that fluctuates with rate changes.
The monthly payments are generally cheaper than payments with fixed rate loans and the term is open for prepayment or total pay off at any time without penalties. This is the ideal mortgage loan for people who don’t want long term security because they only plan to keep their home (and the loan) for a short period of time.
One of the major disadvantages of variable rate home loan plans is the uncertainty with payments. A mortgage loan is usually a substantial amount of money and any change in interest rates will directly affect your monthly payments. If interest rates drop it’s to your advantage, but if interest rates go up so will your payments. There is absolutely no protection or security when it comes to the economic climate and interest rates.
According to News.com “New research by Canstar shows that over the last 20 years borrowers have done better by riding the variable rate roller-coaster.” But that’s not to say variable rates are for everyone. Some people prefer to pay a little more money each month in exchange for peace of mind over the long term with fixed interest rates. Which type of mortgage loan borrower are you?