How to Choose between Fixed Rate vs Variable Rate Home Loans

When buying a home you will be faced with several decisions, specifically, whether the loan interest is fixed or variable. There are benefits to both types of mortgages, and the best option depends on your particular situation and financial goals.

Uncertainty in fluctuating interest rates can create problems for both homeowners and financial institutions alike. Fixing your interest rate or allow it to fluctuate with the market can have significant repercussions down the road. In the following article we will explore the major differences between fixed and variable loan structures.

Understanding fixed rate home loans

Fixed rate home loans have an interest rate or a pre-determined period. The homebuyer can know from day one exactly how much interest they are going to pay over time. On the whole, these loans are less flexible – both regarding the interest rate and the repayment structure.

The main benefit of a fixed rate mortgage is the economic certainty. You can budget payments knowing eactly how much interest that will accrue over the term of the loan. However, financial institutions are less likely to allow extra repayments over the term of the loan – which could be a downside further down the road as your financial situation improves.

Fixed rate loans make the most sense when interest rates are currently rising. However, it’s worth noting that rates are almost sure to drop again at some point in the future. With a fixed rate, you won’t be in a position to benefit from these fluctuations.

Variable rate loans follow the market

For those with a slightly greater appetite for risk, variable rate loans put buyers in a position to benefit from future drops in interest rates. If rates are currently high, then a variable rate may appear more attractive – especially for investors who are expecting rates to drop again soon.

While signing up for a variable rate may feel like a risk, research suggests otherwise. Research conducted by Canstar – which compiled mortgage and interest data over the past 20 years – found that using a fixed rate loan to lock in lower interest rates had less than a 50 percent chance of success. More pointedly, the research found that homebuyers who opted for a variable rate fared better over the 20 years in question.

Along those lines, there are certainly situations in which a fixed loan could fare better over the life of a mortgage. However, if you were strictly playing the odds, a variable rate has a better chance of overall success.

ACA Mortgage Solution will secure the best rate for you

Our Mortgage brokers specialise in securing the best home loan packages for our clients. We will help you decide whether a fixed or variable rate is a better option. Contact us today to learn more about the loan options available to you.