We recommend you consider your current work situation, your regular monthly income, possible future changes such as getting married or starting your family, your future income or salary – is there the possibility that your monthly income grows? – and the possibility of selling the house in the future. All these are important aspects you should thoroughly take into consideration before deciding what to opt for.
Fixed rate home loans
A fixed home loan rate means you can establish a certain fixed interest rate. Thus, whether the interest rate falls or rises, you will have to pay the established fixed rate. Let’s see what are the main advantages to opting for a fixed rate home loan.
- You can benefit from knowing exactly the repayments you will have to make, as well as the possibility of establishing your interest rate for a longer amount of time.
- Opting for fixed rate home loan will make it easier for you to budget your future finances – you know the exact sum you need to pay.
- If the rate rises above your paying interest, that won’t affect you in any way – you’ll be paying the fixed rate, which is less than the variable rate, so that’s a plus.
Now let’s take a look at the main disadvantages that come with choosing a fixed rate home loan.
- If the interest rate decreases, you will be paying your fixed rate that is more than the variable rate. Thus, you won’t be able to take advantage of the rate decrease.
- You won’t be able to benefit from making unlimited repayments. Still, this might be a viable option if you choose to pay an additional fee.
- In case you decide to alter or pay off your fixed home loan, you will be required to pay for additional break fees and penalties.
Variable Rate Home Loans
A variable rate, as its name already indicates, is the rate that may either rise or drop during the period of the loan, depending on a wide range of factors such as the official interest rate. This official interest rate is established by the Reserve Bank of Australia. So, the main disadvantage that comes with this option is that the rates fluctuate, and they might increase month by month. So, you don’t have any certainty regarding the sum of money you have to pay every month.
But what are the benefits? Let’s discover them in the following paragraphs:
- You can benefit from a wide range of extra options such as flexibility, repayment holidays and introductory rates.
- If you have the ability to make extra repayments that will aid to shorten the life of the loan, you can opt to do that, without having to pay for any additional fees.
- You have the withdrawal option, be it the case you need money.
- The savings in your transaction account can contribute to decreasing your loan balance.
To sum up, you should weigh the pros and cons of both home loan options and consider which one is more suitable to your financial condition. If you are unable to decide between the two choices, maybe you should think of talking about your finances with a professional.