Home Loans – Fixed Versus Variable Rates

A question that all homeowners face when financing their property is whether to go for a loan with a fixed or variable rate. It can get quite confusing as to what is best, particularly in tough financial times. There are a number of factors that determine which type of interest rate is best for your situation and quite often expert help is necessary to help wade through all of the information. Using a broker who specialises in financing, including home loan and cash loans, is a good idea as they can help find the product that suits you best. Consider the follow points to help you decide.

The argument for fixed loans

Fixed rates do exactly as the name suggests – the interest rate is set in stone for a certain period of time and won’t change as official interest rates fluctuate. This can make them enticing to borrowers if interest rates are tipped to rise in the future. They are popular, but not as popular as variable rates. Fixed rates can be good if you want to stick to a set budget for a certain period of time. The repayments won’t change as interest rates change. It is important to consider the period of time you plan to fix the rate - it can be as high as 10 years, but the most popular is three. Most fixed rate loans allow borrowers to have flexibility in the repayment options, such as paying extra or weekly. As with all loans, pay particular attention to any extra fees that apply for paying the loan off early or switching loans.

The argument for variable loans

These types of loans usually offer greater flexibility but come with the uncertainty of changing interest rates. This means that in trying financial times, the interest rate can change regularly and that can put your finances on edge. It’s important when taking out a variable rate loan that you plan for the future and ensure you can cover any interest rate rises. Of course, if interest rates fall then there will be extra money in your pocket. “Honeymoon” rates often apply to new variable loans where a lower interest rate is charged for anything from one to three years before the full rate kicks in.

Split rate loans

There are loans available that have a component of fixed and variable rates, meaning you can lock in a portion of the loan at a specific interest rate for a certain amount of time. These types of loans can be beneficial in uncertain financial times, but long term borrowers will not enjoy the full benefits of having just one type of loan.

It comes down to your situation

In the end it is a borrower’s unique financial situation that will determine which type of loan is best. Predictions of future financial scenarios are hard for everyone, even the experts, so it is best to base your decision on your predicted income streams, flexibility and security. It’s worth remembering that fixed rates rarely fall below variable rates, so often split loans are a good option. Just remember to speak to a financial expert when making your decision. It’s not like betting on a hot horse racing tip – this is a serious decision that if made in haste can have serious financial consequences.

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