All home owners know that it’s not a matter of if interest rates will shift, but when. It is a dilemma that many owners juggle when it comes to choosing a variable or fixed rate home loan. While predicting rate shifts is impossible you can still research the benefits of both loan types to ascertain the right one for you.
As an example, a rise in the standard variable home loan interest rate of 1 percent to 2 percent over a year could potentially add a couple of hundred dollars to the monthly repayments of a $300,000 home loans. This may stretch the budget of many borrowers beyond their limits.
The first step is understanding your financial limitations before taking out a home loan. If you think that standard variable home loan interest rates are likely to fall, consider a variable rate mortgage. Alternatively, if you are concerned with making the repayment if interest rates rise, then perhaps you should consider fixing your home loan rate.
Variable rate loan
In most situations, variable rate home loans are often cheaper than a fixed rate home loan, and consequently, long term, you are more likely to come out in front (but this will depend on a number of factors).
Simply put, when compared to a fixed rate home loan, a variable rate home loan can be a better option if interest rates fall, as you’re repayments will also decline. On the flipside, a variable rate home loan can also be a better choice if interest rates remain stable as they allow you the flexibility to pay off more of your loan faster than a fixed rate home loan.
Fixed rate loan
However, that is not to say that a variable rate home loan is always the best option. If the standard variable home loan interest rate rises significantly and stays high, the interest you pay will be higher than a fixed rate home loan.
The big advantage with a fixed rate home loan is that your repayments never change over the term of the home loan. This offers financial security against any future interest rate hikes, which can be comforting if this is your first home loan and you’re inexperienced in the vagaries of home loan interest rates.
While you won’t be able to predict interest rate rises hopefully by doing your research and looking into the benefits of both loan types you can select one that is going to best suit your current financial situation. To carry out your own research compare home loan types with the home loan comparison tool and work out the repayment differences with the repayment calculator.