Being a homeowner is a great feeling because it’s a sign of financial security. However, most people can’t afford to pay for a house out of pocket, so they apply for a mortgage instead. A mortgage is a loan given to a prospective homeowner that will be used to pay for the house according to specific terms.
Most people have two options in Australia: fixed home loans and variable home loans. These two types of loans come with their own advantages and disadvantages, so one must understand how they work before deciding. We’ll discuss the details in this article, so read on below to get started.
As the name suggests, fixed home loans are loans with costs that remain the same throughout the repayment term. This is the ideal mortgage choice for borrowers on a budget, and you can choose when to lock in the fixed rate. Generally, this could go as far as 10 years, though some lenders allow 15.
However, this can be a double-edged sword because you could get stuck with the fixed rate if interest rates decrease. Unlike variable loans, they have lesser features, such as not accessing the redraw when the loan is set.
It’s also worth noting that you might need to pay break costs if you pay off or refinance your home loan before the agreed-upon end of the fixed term. These may be significant sums of money, which also puts you at a disadvantage.
Since fixed home loans restrict borrowers in many aspects, variable home loans offer more flexibility. It has various features a borrower can benefit from, such as letting you make further payments to repay your loan faster. Consequently, you will also be able to redraw the money should you need it in the future. In some cases, you may also be allowed to offset your account, which can help reduce interest rates.
However, the drawback lies in that interest rates can change without notice. This puts you at a disadvantage because you might need to pay more without being informed.
Choosing between is determined by your specific situation, so you should consider whether you’re the type of person who can plan ahead or just want to enjoy the present without worrying about the future. If you’re the former and want to lock in your interest rates, you may choose fixed home loans.
However, if you’re a risk-taker and don’t mind paying more if rates decrease, a variable home loan could be right for you. It all comes down to what you’re looking for and how you see your future.
Alternatively, you can split your loan between the two options. By splitting, you assign a specific portion of the loan to either of the two options. Depending on your preferences, the split could be 50/50, 60/40, or any other ratio. Be sure to consult with your lender first to explore your options.
With the abundance of lenders, it can be challenging to decide which one to choose. Fortunately, it’s relatively easy because you only need to check their customer reviews, which is an essential factor to consider. This gives you an idea of their customer support, what they’re capable of, and how they approach their clients.
You should also check out the rates and features of each lender, which allows you to see what they have to offer. Once you’ve narrowed down your options, you can select the best one for you.
Mortgages are an obligation for many people because it fits their budget and financial situation. However, there are many things to consider before deciding whether to choose fixed or variable home loans. Once you’ve considered the factors and have decided, it’s best to speak with a lender for more information.
If you’re looking for guarantor loans, Shore Financial can help you! We understand our clients’ financial circumstances, so we assist in ensuring that you get the loan you need. Simply go to our website to schedule a consultation!
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