One of the most critical steps in buying a new property is to finance your purchase correctly, ensuring it’s affordable and will not disrupt your lifestyle.
An investigation of mortgage options will see you quickly bump up against a common dilemma: should I select a fixed or variable rate?
There is no right or wrong answer. The answer depends on your lifestyle and your threshold for risk.
In the current market, interest rates are at record lows. And while the Reserve Bank has made it clear rates won’t be going up anytime soon (although there’s never a guarantee), there’s little room left for them to fall any further.
This is why some homeowners are locking in a super-low fixed rate now. Others are taking their chances with a variable rate that can go even lower if times get more challenging.
Below is a look at the specifics of each option.
Variable Rates
The cost of borrowing rises and falls depending on economic factors, such as inflation, the cost of money and the subsequent decisions taken by the Reserve Bank of Australia (RBA).
Usually but not always, lenders pass on the savings of an interest rate cut. However, banks have also independently increased their mortgage rate, citing the cost of doing business.
Variable interest rates do not have a fixed term. However, introductory rates – also known as honeymoon rates – can offer discounted arrangements over a set time.
Significantly, variable-rate loans allow more flexibility on repayments, enabling you to pay down your mortgage faster than the schedule.
Fixed Rates
A fixed loan remains at the applied interest rate regardless of external factors. This will enable you to budget consistently for your mortgage.
Most consumers opt for a fixed-rate loan of up to three years, although extended options also exist. Many will lock in a rate when they believe it is at a low point. However, you should be aware that some lenders stipulate you cannot pay down the loan faster than the prescribed schedule.
Conclusion
Discuss your options with your mortgage broker to pick the right product for your circumstances and make sure you understand the pros and cons and real costs of each one.
- This article is provided for general information only and does not take into account the specific needs, objectives or circumstances of the reader. Before acting on any information, you should consider whether it is appropriate for your personal circumstances, carry out your own research and seek professional advice.