Difference Between Variable and Fixed Rate Mortgages

Fixed Rate Mortgages

Whether you’re purchasing your first home or buying an investment property, parting ways with a significant sum of money is always daunting. There are lots of factors to consider before getting to the point of officially buying a home. One of which is deciding on what mortgage you want.

From the mortgage amount to length and rates, there is a ton of information to digest which can often feel overwhelming. You can always speak to a fixed rate mortgage broker in Essendon, but for starters, we explain the difference between variable and fixed-rate mortgages below.

What is a fixed-rate mortgage?

When you enquire about a home loan there are many types of mortgages available, but when it comes to rates, you’ll typically be presented with two options, fixed or variable. A fixed-rate mortgage is exactly how it sounds, and the rate is locked in or ‘fixed’ for the duration of the loan. It can often be deemed as a more ‘predictable’ mortgage, as the lender has to forecast keeping repayments at a certain rate for a specific period and work out the interest based on this calculation. Because of this, lenders usually offer fixed rates for a period of time between one to ten years. After ten years, loans typically roll over onto a variable rate, or you can choose to reset and begin another term with a fixed rate.

Pros of fixed rate

The best part of having a fixed-rate mortgage is that you get peace of mind, as it often eliminates any surprises or market fluctuations. Once you have agreed on the rate and the term, you just need to concentrate on your finances and simply keep up with your regular payments, which will be the same every week, fortnight or month. It’s a great option if you are wanting to stick to a budget, and you prefer having foresight over exactly what you are spending. The main advantage of a fixed-rate mortgage is that you have protection against fluctuations in interest rates.

Cons of fixed rate

While there are many obvious benefits to choosing a fixed-rate mortgage, there are some downsides to be aware of. There is an element of chance with both rate options, and while fixed rates protect you from rising rates, there’s also a risk that you could end up paying more if or when variable rates decrease. In the event that you want to pay off your loan early, you may be subject to paying significant breakage costs. Another thing to consider is that they are usually fewer features to a fixed-rate loan than with a variable and you may be unable to access things like a redraw during the fixed-rate period.

What is a variable rate mortgage?

A variable-rate mortgage is a type of loan where the interest fluctuates and may increase or decrease during the loan’s team. As interest rates change, so too will your monthly payments. Variable rates change for a number of external reasons such as the economy, how the lender is faring in the market and more. This option would suit someone who isn’t as budget conscious and is comfortable choosing flexibility over a guaranteed rate.

Advantages of a variable rate mortgage

In direct comparison to fixed-rate mortgages, variable rate loans offer a lot more flexibility and features. These options are there to adapt to any change in your life or financial situation. If you’re in a position to pay off your mortgage faster, having a variable loan means you can access a redraw further down the line without incurring any additional charges. Many lenders will also offer an offset account with a variable mortgage rate, allowing you the option to reduce your interest costs.

Disadvantages of a variable rate mortgage

The biggest disadvantage of this loan type is the uncertainty of how rates will fluctuate. Some months they may decrease and work in your favour, but for the occasions where they don’t, you’ll end up paying a higher monthly payment. To make up for the lack of foresight on rates, you’ll need to be financially savvy and plan ahead for times where you may have to pay more money to your lender.

Can’t decide? Perhaps consider a split loan

We understand that picking one rate option over the other can be a difficult decision. That’s where a split loan can be a good option, with one portion lent at a fixed-rate and the other portion given under variable rate terms. This can give people the best of both worlds, with some freedom of a variable rate while also having the security of a fixed-rate loan.

Interested in learning more about your mortgage rate options? You can learn from variable and fixed rate mortgage brokers in Essendon by visiting Mortgage Choice.

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BSV Staff

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