When searching for a home loan, you will be presented with a range of loan options, allowing you to pick the loan most suited to your individual needs. One of these options includes a choice between a fixed rate or a variable rate loan.
Fixed Rate Vs Variable Rate
As the name would suggest, a fixed rate loan is where the interest rate is locked in for a specific period, usually you have a choice of one to five years, after which the loan reverts to a variable rate loan. This is different to a loan with a variable rate, where the interest rate changes based on the fluctuation in the cash rates.
Each type of loan will suit a different type of individual. To find out which one suits you best, there are a number of questions you have to ask yourself:
Where will the Market Head in the Future?
Though it is impossible to say with certainty where the market is heading, there are a number of economic indicators, which hint at the general direction of the market in the future. If you have an idea where the market is heading (and thus the direction of the interest rate), it will help you choose the most appropriate type of loan. For example, if interest rates are set to increase, , you could opt to fix your rates so you can benefit from the low rates for longer. If the interest rates are set to go down however, choosing a variable rate loan will help you take advantage of the reduced rates in the future.
What Would You Choose: Predictability or Affordability?
The benefit of a fixed rate loan is that it makes your mortgage repayments predictable for a certain period, since you know how much your principal and interest repayments will be. If you require more affordable interest repayments, a variable rate loan may be the better option for you.
How Soon Do You Plan to Pay Off the Loan?
In general, a fixed rate loan is less flexible compared to a variable rate loan. For example, with a fixed rate loan your lender might charge you if you pay off your loan before the end of the term. On the other hand, a variable rate loan will allow you to make unlimited repayments with no extra charges. With this in mind, ask yourself if you plan on paying off the loan before the end of the term as it may affect your loan choice.
It is important that you carefully consider your options first before you take out either a fixed rate or a variable rate loan. At Launch Finance, we can help advise you on these issues and find the right loan to suit your individual requirements.