When it comes to choosing a home loan lender, it’s important to make a decision based on your personal circumstances. While friends, family and colleagues will offer all kinds of mortgage advice, the fact is their expertise will usually be limited to personal experience. So, how do you make a smart financial decision? Having the different kinds of mortgages explained in simple terms is a good place to start.
While there are literally hundreds of different mortgages to choose from, most will fall into one of the following 2 categories: a variable rate home loan or a fixed rate home loan. What are the key differences between these different kinds of mortgages and how can you decide which one is the best option for you?
Variable Rate Home Loans:
Also known as a variable interest mortgage, variable rate home loans come with a changeable interest rate that could move up or down depending on the interest rate set by the Reserve Bank of Australia. This kind of mortgage has the potential to save you money over the life of your loan, but it does depend on the current financial climate.
At the moment, the Reserve Bank Rate is at a historic low, so many variable interest borrowers will be benefiting from lower monthly repayments. Some people will use this as an opportunity to make higher than necessary repayments, thereby lowering the principal portion of their home loan.
However, with a variable interest mortgage there is always the potential that your monthly repayments will go up should the Reserve Bank Rate be increased. When choosing a variable rate home loan, you need to ensure that you’ll still be able to meet your monthly repayments in the face of multiple rate rises.
Fixed Rate Home Loans:
A fixed interest mortgage will usually come with a set period of time where your interest rate is guaranteed to stay the same. This kind of mortgage often comes with a slightly higher interest rate, but a greater level of certainty – borrowers know exactly how much they’ll owe each month and can budget accordingly.
A fixed rate home loan will typically have a higher interest rate than a variable home loan, but in the face of multiple rate rises you could actually end up saving money overall.
The downside to a fixed interest mortgage is that they are generally a little more restrictive when it comes to making additional repayments. To get around this some borrowers will opt for a home loan that is partially fixed and partially variable – the variable portion allows them to make added repayments while the fixed portion makes it easier to budget.
Fixed rate home loans will only offer a set interest rate for a specific time period (typically 1-5 years), at the end of which the mortgage will roll over to the standard variable rate of the lender.
The expert team at North Brisbane Home Loans would be happy to talk you through the various pros and cons of fixed rate and variable rate mortgages. Contact our office today on Ph: 07 3889 9719 or via email: email@example.com