When we talk to potential customers about home loans in Perth, we are often asked, “Could you please explain the difference between a fixed rate loan and a variable rate loan?” While it can sound like a simple question on the surface, it is actually more complicated than one would think. Moreover, the choices one makes can save or cost thousands of dollars over the length of a loan.
Let’s take a look at both loans and know when they are most appropriate.
Fixed Home Loan
A fixed home loan is exactly what it sounds like–but with a lot of conditions. The rate of interest on a fixed home loan remains constant for an agreed period of time, usually between one year and five years. If your fixed home loan is for an interest rate of 5.5% over five years, it will stay that way for five years.
The borrower then has the option of negotiating another fixed rate loan, or allowing it to automatically become subject to variable rates. The major downside to fixed home loans is that it can cost up to $10,000 in early repayment adjustments and “break fees” to end the loan early.
Variable Home Loan
A variable home loan is also just as it sounds: the rate varies, rising and falling within the term of the loan. The lender has complete control over the rates and usually adjusts rates up or down according to the current state of the market.
ABS data infers that approximately 80% of home loans are written at variable rates. Those who want to refinance loans especially benefit from variable rates.
How to Choose
If you are confident that rates are not going to go any lower and you don’t plan on refinancing or ending your loan early, a fixed home loan may be right for you. It is especially good for those who know exactly how much money is coming in to them and can easily fit their repayments into their budget for the loan’s full term.
However, if you need flexibility and want to either refinance or end a loan early, the variable loan could be to your advantage.
For more question about home loans in Perth, call (08) 9472 9766 today.