29 May 2017

Which is Better, a Variable or Fixed Rate Loan?

Buying a home is the biggest investment that you will probably ever make. Therefore, it is essential that you make wise decisions when choosing the type of loan you will take out on your mortgage. Before you sign off on a home loan it is essential that you get advice from professionals within the industry to ensure that you make the right decision. There are several different loans that you can take out, these include a fixed rate home loans and a variable rate home loan.

A loan with a variable interest rate is a floating rate that can go either up or down, depending on market conditions. Your loan repayment will change as the interest rate changes.

A fixed rate loan is when the interest rates are fixed for an agreed term, and within that term the rate will stay the same regardless of changes to variable rates.

Some borrowers like to lock in a fixed rate if rates are on the increase to give them increased security. When rates are going down, variable rates are generally preferred so the borrower gets the benefit of falling rates and aren't locked into a rate higher than the variable rate. 

A third type of borrower will look at split loans, where part of their loan is fixed and another part is variable. This will depend on circumstances of the individual customer.

Using a mortgage calculator will assist you in estimating the difference in your mortgage payments depending upon the type of mortgage that you choose. You can determine scenarios where there are different interest rates and how that will impact your repayment schedule.

Final Thought

Once you have decided on the loan you are going to go with, ensure that you read all of the small print in your documents and familiarise yourself with the terms and conditions of the agreement. It is also important that you are aware of any penalties that are incurred if you miss a payment.