Advantages and Disadvantages of Fixed-Rate Home Loans
Applying for a home loan? If so, then you need to consider numerous factors that can affect the overall amount of the loan and the size of the monthly mortgage repayments.
Among the various factors, interest type is one of the most important factors that can change the game. Fixed interest rate and variable interest rate are the two types of interest rate that usually preferred by most of the homebuyers while applying for home loans in Australia.
In home loan with a variable rate, the interest rate decreases or increased according to the discretion of the lender and the final decision made by the lender is according to the official cash rate set by the Reserve Bank of Australia (RBA) every month. On the other hand, in the fixed rate home loan, the monthly mortgage repayments will be the same for a certain period of time. In this type, the interest rate will be locked and despite any changes in the lender’s funding costs or the official cash rate, the interest rate will not change. Thus, if you are a home buyer and applying for a home loan then make sure to consider the pros and cons of the interest types.
Here we will discuss the advantages and disadvantages of fixed interest rate loan:
Advantages of Fixed Rate Home Loan
Predictable mortgage repayment
In the fixed rate home loan, the monthly repayments will be fixed for a set period of time and you will be knowing the exact amount that you have to pay monthly. The fixed rate term gives you certainty for 1 to 5 years.
Flexibility to maintain a lower interest rate
Even if the Reserve Bank of Australia will raise the official cash rate, your interest rate will remain the same in the fixed rate home loan. Therefore, it will ultimately lower the total payable interest rate on your home loan.
You can easily plan your household budget when you already know the exact amount that you need to pay every month in the mortgage repayment.
Disadvantages of Fixed Rate Home Loan
No extra repayments
In the fixed rate loan in Australia, the lenders usually do not allow to repay the mortgage faster by repaying the extra repayments. In order to make alterations in your home loan, the lender will ask you to pay additional fees in the fixed rate home loan.
No benefit of falling interest rate
The interest rate can decrease according to the official cash rate set by the Reserve Bank of Australia (RBA). In the fixed rate home loan, you won’t be able to take advantage of a lower interest rate home loan.
If you want to take advantage of declined interest rates during the fixed-rate home loan, then you may have to pay the high break fees.
The above-mentioned pros and cons can help you to understand, how fixed interest rate is right for you while applying for a loan in Australia. Consider these points along with your personal financial situation to make the right decision about the interest rate type.