Fixed or Variable Rate Home Loans- How to Find the Best Option?

Buying a property is one of the biggest investment decisions which a person makes in his life. Therefore, it is important to make sure that person is taking all the right measures while making this investment decision. One crucial element upon which the buyer should pay most of his attention involves deciding the type of home loan which perfectly suits his financial requirements. Usually, there are two major types of home loan options trending in the market these days- variable rate and fixed rate loans.  

Majority of all the banks' and several other finance lending institutions offer both variable and fixed rate loans in Australia. But in order to decide which loan is right for you, it is essential to have a clear understanding about both of these loans. Here in this article, we’ve described the meaning and features of both variable and fixed rate loans and what factors you should consider while making a choice between these two.  

Fixed rate home loans 

A fixed rate loan refers to the type of loan in which the interest rate charged on loan remains fixed for that loan's entire period, irrespective of the nature of existing market interest rates. This implies that the borrower has to make the same payments throughout his loan’s term period. For the fixed rate loans in Australia, the interest rate is fixed commonly for a period between 1 to 5 years, but longer fixed rate terms also exist. After this period, the rate gets reverted back to a variable rate, unless the borrower decides to enter into another fixed-term contract. 

Variable rate home loans 

A variable rate loan is another type of home loan option in which the interest rate shifts depending upon the nature of changes in the market. In short, this means that the interest rate under a variable rate home loan can rise or fall during the time period of the loan taken by the borrower. The amount of interest charged on the loan is linked to an underlying benchmark or index, such as the federal funds rate. Often, the variable rate loan offers more flexibility in comparison to a fixed rate loan, but along with this flexibility, also comes the risk of interest rate changing over the life of the loan.  

Deciding which type of home loan is best  

Given that both variable and fixed rate home loans have their own advantages and disadvantages, it is not possible to determine which one is better from the other. Therefore, the buyer of the loan should make the selection depending upon his personal requirements. And for this, he should take into consideration these following 3 factors and then decide accordingly- 

Nature of his monthly income: For the borrowers who have a strict budget, opting for a fixed rate home loan is the best option as this loan will keep everything predictable. But if the borrower enjoys some flexibility in his budget and is able to handle an increase in rate of interest, then a variable rate loan will work better for him. 

Loan period: If the borrower wants to take a long-term loan, then variable rate loan serves to be right choice as it provides lower monthly repayments when the rates are low, and works out cheaper in long-run. However, for the borrowers interested in short term loans, fixed rate home loan is the right option. 

Current market rates: Before selecting a home loan type, it is important to evaluate the current as well as past year’s market conditions and interest rate as it helps the borrowers in getting a sense of overall trend in the market. If the current interest rates are lower in comparison to the average interest rates from the past year, then the borrower can consider taking a fixed rate loan, since it will be fixed at the low rate for the entire loan period.  

Experts Advice on Fixed and Variable Home Loans by Your Finance Adviser  

Your Finance Adviser is Australia’s leading and most trusted finance advising organization. It works with a dedicated team of the best finance brokers in Sydney who are experts in providing all types of home loan advice to all types of clients located across Australia and help them in finding the best home loan option specific to their needs.  

To find out more about Your Finance Adviser, visit their website online at www.yourfinanceadviser.com or call on 02 8322 6895.