What Australian Home Buyers Need to Know About Fixed Mortgage vs. Variable Mortgage

Fixed Mortgage vs. Variable Mortgage

Based on recent statistics, variable home loans are more popular in Australia. According to the Finder website, only 14.9% of issued mortgages in December 2017 were fixed loans.

Does this mean you should go with a variable rate mortgage too?

Experts advise considering your unique circumstances above anything else when deciding on which type of home loan to apply for. This is because various interest rates and loan types can impact you differently. And since buying a home is the most expensive investment most Australians make, you want to make sure you play your cards right.

Take a look at the differences and the pros and cons of fixed rate and variable rate mortgages so you can better determine which one is ideal. Assess your goals and current financial situation as these will also affect your decision.

Fixed Rate Home Loan

With this type of financing, you will pay a fixed interest rate for a set number of years (typically one, three, or five years). In most cases, your loan will switch to a standard variable rate after the fixed rate period. Another scenario is you can choose another fixed rate term.

Pros

  • You won’t be affected by rate hikes during the fixed period of your loan. This provides you with more security.
  • Budgeting is so much easier since you already know how much you need to allocate for mortgage repayments each month. This also makes it easier to set other financial goals.

Cons

  • If there is a drop in rates and the variable interest is lower than your fixed rate, you can’t enjoy the decrease in rates.
  • Most lenders place a limit on the number of additional repayments you are allowed to make. If you exceed this, you will face a penalty.
  • You usually have to pay break costs if you pay off your loan within the fixed rate term. You may have to do this when you have to sell your home or apply for refinancing.
  • Redraws are generally not offered.
  • Mortgage terms and features tend to be less flexible.

Go for this if…

  • You want stability and security in making the same repayment amounts.
  • You don’t have any plans of selling your home, renovating, or applying for refinancing in the near future.
  • You don’t want to be affected by fluctuating interest rates.

Fixed Rate Home Loan

Variable Rate Home Loan

This type of mortgage has rates that can rise and fall depending on the current official interest rates. It has more flexible features and terms as well as cheaper fees compared to fixed rate loans. This is most likely why it is the most popular type of financing in the Australian residential real estate market.

Pros

  • If interest rates drop, you get to enjoy a decrease in rates too.
  • You typically pay cheaper fees. One reason is that you won’t have to pay a charge to fix an interest rate like what you would do for a fixed rate loan.
  • You can enjoy unlimited redraws.
  • There are usually no penalties if you want to repay your mortgage sooner or wish to make additional repayments.
  • In case you find a better home loan deal, it is easier to switch.

Cons

  • If interest rates rise, this can adversely affect you since you’ll have to make bigger mortgage payments. This is one reason why some homeowners cannot keep up with their loan repayments.
  • No one can perfectly predict the rise and fall of interest rates.
  • It is more difficult to set financial goals and make a budget during unpredictable movements of interest rates.
  • The unpredictability can be a cause for stress.

Go for this if…

  • You want to have the flexibility of making unlimited repayments without any fees.
  • You are planning to renovate, refinance, or sell your home in the near future.
  • You wish to take advantage of redraw facilities.

Variable Rate Home Loan

Real estate investing is a big decision that costs huge sums of money. Thus, you want to get as much advice and guidance as possible in making the right choice.

Talk to finance, real estate, and mortgage specialists, stay updated on the current market trends, and don’t rush into putting your signature on the first home loan that comes your way.

Once you find the right mortgage type, get in touch with the most well-trained and transparent real estate agents in Western Australia at Naked Real Estate. They will help you find the best deals and provide their clients with alerts on new properties 48 hours before the rest of the world. Get to know more about their services on their website.

If you are an immigrant in Australia, here is a helpful guide on how to buy property in the country.

Posted On 24 Apr , 2018

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