Are you planning to buy a house in the near future? One of the main things to do when it comes to home loans is to compare mortgage rates. You can use a home loan calculator that can give estimates on your monthly mortgage repayments and other details. Another thing to look into is the type of home loan. In general, it can be a fixed rate home loan or a variable rate home loan. Of course, each has its own share of pros and cons. In this article, let’s take a look at the features, benefits, and drawbacks of these loan types:
Fixed Rate Home Loan
As the name implies, this type of loan comes with a fixed interest rate for a particular period that can be one year, three years or even five years.
One of the advantages is that since it has a fixed rate, you already know how much you need to pay on a regular basis, enabling you to manage your finances and work around your budget. Also, in case there is an increase in interest rates, you will not be affected.
Now here are the drawbacks of getting a fixed rate home loan. First of all, it said that you will not be affected by rate increase. But the downside is, you will not be able to take advantage of interest rate drops which can make your mortgage repayments lower. Also, you may not be able to redraw as this facility may not be available on this loan type. In case you found a better home loan deal and you want to change your loan, a fixed rate home loan may come with a break fee.
Variable Rate Home Loan
Unlike the fixed rate home loan, the variable rate home loan is affected by interest rate fluctuations. Your loan’s interest rate will move depending on the market rates. This leads to variations in your monthly repayments.
One of the benefits of this loan type is that extra repayments are allowed without additional costs. Making extra repayments can help you pay off your home loan sooner than expected, plus save on interest. It is also easy to switch home loans in case you’ve found something better. The variable rate home loan likewise offers other features such as unlimited redraws on extra repayments as well as setting up an offset account, helping you save on interest.
Of course, since your monthly repayments vary, it can make budgeting more difficult. What’s worse is that you may not be able to keep track and make your mortgage payments if you’re not aware of interest rate increase.
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