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When buying a home, understanding mortgage options is crucial. Let's explore the key differences between fixed and variable rate home loans to help you make an informed decision.
Table Of Contents
What is a Mortgage?
A mortgage, or home loan, is a loan designed for purchasing property. It’s a legal agreement where a lender provides funds to buy a home, and the borrower repays the loan over time with interest.
Here are its key components:
Principal: The loan amount.
Interest: The cost of borrowing, as a percentage of the principal.
Amortisation: Gradual repayment through regular payments.
Fixed-Rate Mortgages
Fixed-rate mortgages offer a set interest rate for the fixed period you select, typically from 1 to 5 years. This provides stability and predictability.
Benefits | Drawbacks |
Interest Rate Stability: Your interest rate and repayments remain constant for the fixed period. | Fixing at the wrong time: Fixing at the wrong time: No benefit from falling interest rates if you fix at the peak (unless you refinance) which may trigger break costs. |
Easier Budgeting: Fixed repayments simplify financial planning for the household budget. | Less Flexibility: Fixed rate products usually allow up to a certain limit on extra repayments and no access to offset account |
Variable-Rate Mortgages
Variable-rate mortgages have interest rates that change with market conditions, offering initial lower rates but with potential for variance.
Benefits | Drawbacks |
Potential Savings: in conjunction with linking the offset account, further saving on interest costs. | Financial Unpredictability: Payments can increase if rates rise. |
Pay off loan faster: allows extra/bulk repayments without incurring any penalties | Risk of Rising Rates: Higher payments if market rates go up (as evidenced recently) |
Comparing Fixed and Variable Rates
Fixed-Rate Mortgages
Set interest rates and repayments.
Ideal for stability to assist with budgeting.
Variable-Rate Mortgages
Fluctuating interest rate and repayments.
Suitable for those wanting to make extra repayments and pay off their mortgage sooner.
A popular option amongst borrowers is to combine variable/fixed as a split loan. This allows you to take advantage of both. For example, having 20% on a variable rate with the offset account linked and 80% fixed for a few years.
Making an informed choice
Consider your financial situation, market conditions, and future plans. Fixed-rate mortgages are great for stability, while variable-rate mortgages offer flexibility and ability to pay off your mortgage faster. Consulting with a mortgage broker can help you choose the best option for your needs. At The Happy Home Broker, we’re here to help you navigate your home loan options. Understanding fixed and variable mortgages ensures you make an informed choice, securing your financial future.
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