Anyone looking into home loans in Perth or keeping an eye on the fluctuating interest rates in Australia will likely have heard of the terms “fixed rate” and “variable rate”.
But what exactly do they mean? What are the key differences between the two? And which is the best for mortgages for first time buyers or people who are refinancing through their home loan mortgage broker?
In this blog, we’ll run through everything you need to know about these fundamental financial concepts and explain how the interest rates can affect your repayment and loan terms.
Understanding the key differences between fixed and variable home loans is essential when navigating the mortgage market.
What are Fixed Home Loans?
When your mortgage broker refers to a “fixed home loan” what they mean is that the interest rate you pay on top of your loan repayments when you buy a home is set. For example, you may have a fixed rate of 3.5%. This means that regardless of what else is going on in the economy or with the Reserve Bank of Australia (RBA), you’re going to only pay 3.5% interest.
Fixed home loans are only offered for a set period of time. During the duration of that term, the interest rate remains the same but once that period ends, you may no longer be paying that same rate. In other words, the 3.5% fixed rate may be offered for 2 years only.
Key Factors to Understand
- With a fixed interest rate, your repayments are locked in so you know exactly how much you’ll be paying each month for the entirety of the fixed rate period.
- Rising interest rates set by the RBA do not increase your repayments and lower interest rates do not affect your repayments either.
- Fixed interest rates are offered for a set period of time.
Benefits of Fixed Rate Home Loans
The predictability around your repayments can provide peace of mind and certainty for many mortgage holders. Without worrying about the changes in interest rates affecting your mortgage rate, you can better budget, set financial goals and meet your repayment obligations.
Disadvantages of Fixed Rate Home Loans
With the stability of a locked in mortgage rate comes less flexibility. This may be in the form of penalties or an inability to make extra repayments. It may also mean that there are break fees to pay in the event you refinance or want to sell your home. Additionally, if interest rates do fall, you won’t benefit from the momentum.
Lastly, the revert rate at the end of your fixed term can be higher which will suddenly impact your home loan repayments. Make sure to speak to your mortgage broker in Perth to find out more about the applicable rate at the end of the term if you’re considering fixing your mortgage.
What are Variable Home Loans?
In contrast to fixed home loans, a variable rate fluctuates in line with both internal factors to do with the financial lender and external factors, most notably the interest rate set by the Reserve Bank of Australia.
With a variable rate, you may be paying 3.5% interest this month only to be paying 3.75% next month should the interest rates or internal rates at the bank or lender of your choosing rise. On the flip side, should the RBA lower interest rates or your chosen lender reduce their variable rate to continue being competitive in the market, you’ll pay less in your monthly repayments.
Key Factors to Understand
- With a variable interest rate, your repayments are not locked in so the exact amount you will be repaying can fluctuate based on various factors.
- Rising or falling interest rates set by the RBA may change your repayments.
- Variable interest rates are generally offered indefinitely unless you fix all or part of your mortgage.
Benefits of Variable Rate Home Loans
Variable home loans offer a lot of flexibility. You can make additional repayments to pay off your loan quicker or take on more debt to fund renovations or expansions. Additionally, if there is a rate cut, your bank or lender will likely pass on that saving to you in order to retain their competitive advantage in the industry.
Disadvantages of Variable Rate Home Loans
Of course, the fluctuation in interest rates will have an impact on your repayments. Rate hikes will mean you pay more each month and the uncertainty in the market and in the decisions of the RBA can leave you with some uncertainty around your expenses. Without enough of a financial cushion, this can make budgeting more difficult for many mortgage holders.
Interest Rates – what you need to know
Interest rates affect both fixed and variable home loans. Banks and lenders use the interest rate to help determine what they’ll offer customers on both fixed and variable mortgages.
As a general rule, positive economic outlooks mean the RBA is likely to cut interest rates or at least allow them to remain them unchanged. However, when there is a risk of inflation (that means more money circulating in the economy which devalues the worth of each individual dollar), the RBA raises interest rates. This is an attempt to curb spending across the board and is often referred to as monetary policy.
It can be difficult determining which way interest rates are going to go because there are many complicated and interweaving factors that can affect the RBA’s decision.
Stability vs. Flexibility – how to assess your risk?
As a general rule, the choice between fixed and variable loans is a choice between stability and flexibility. Whether you are looking for the best mortgages for first time buyers or just want to refinance, you need to evaluate your own financial security, objectives and circumstances.
There are risks with both fixed and variable interest rates. With the former, you have less ability to vary your repayments, pay off your loan sooner or refinance/sell. With the latter, you are subject to external factors which could cause your repayments each month to fluctuate.
Make the right choice first – choose Loan Monster
Professional advice will ensure you understand everything there is to know about the home loan options available for you. With the experts here at Loan Monster, your local home loan broker in Fremantle, we’ll help you make the right choice on the best mortgage by ensuring you’re informed, in control and taken into account.Ready to find out more? Contact our home loans Perth team today for a friendly chat!