Variable Vs Fixed Interest Rates
When it comes to choosing a home loan, one of the most important decisions you’ll make is whether to go with a variable rate or a fixed rate loan. Both types of loans have their own unique benefits and drawbacks, and it’s important to understand the differences before making a decision.
A variable rate home loan, also known as a variable rate mortgage, is a loan where the interest rate can fluctuate based on market conditions. This means that if interest rates go up, so will your loan’s interest rate, and if interest rates go down, your loan’s interest rate will also decrease. The advantage of a variable rate loan is that you have the opportunity to take advantage of lower interest rates if they decrease, which can result in significant savings on interest over the life of the loan.
On the other hand, a fixed rate home loan is a loan where the interest rate is fixed for a specified period, usually 1-5 years. This means that even if interest rates rise, your loan’s interest rate will remain the same. The advantage of a fixed rate loan is the certainty of knowing exactly what your repayments will be for a set period, which can make budgeting and financial planning easier. Additionally, if interest rates rise, you will not be affected by the increases, and your repayments will stay the same.
It’s important to note that variable rate loans generally have lower interest rates initially, but they can be subject to changes over time, which can make budgeting and financial planning more difficult. On the other hand, fixed rate loans have a higher interest rate initially (can be lower in some circumstances), but provide certainty and stability over the fixed period. It’s important to consider your own financial situation and future plans when deciding which type of loan is best for you.
Another important aspect to consider is that with a variable rate loan, you have the option of making extra repayments without penalty, this can help you to pay off your loan faster and also save on interest over the life of the loan. Whereas, with a fixed rate loan, you may be subject to penalty fees for making extra repayments or breaking the fixed rate term (some fixed products allow extra repayments)
In conclusion, the decision between a variable rate or fixed rate home loan depends on your personal financial situation, budgeting and financial planning needs, and your risk tolerance. It’s important to weigh the pros and cons of each type of loan. Azure Finance is here to help with this process. Please reach out for a chat.