The interest rate is the most important factor to consider while doing a home loan comparison. Most people make their decision based on the interest rate and its affordability. There are two types of interest rates available to borrowers today- fixed and variable. Here’s an in-depth look at these two types of interest rates.
Fixed Interest Rate
When you’re conducting a home loan comparisonit is important to make note of the type of interest rates. Most people gravitate towards fixed interest rate because they like the certainty of paying a fixed amount every month for a set period of time.
The interest rate is usually higher than variable interest, but you will only need to pay that particular amount for a set period. This period usually lasts for 5 years, after which the lender will renew the loan contract and switch to a variable rate.
The fixed interest rate is helpful for first home buyers or people who need to keep a keen eye on their finances. It makes budgeting easier. You also won’t have to deal with a rise in interest rates after because of market uncertainties.
Unfortunately, it also means you won’t benefit from lower interest rates. You will have a limit on extra repayments and might have to pay a break fee if you pay off the loan within the fixed rate period.
Variable Interest Rate
Variable interest rate changes are based on cash rate and market conditions. Your monthly installment amount will change based on changes in the market, which makes variable interest rate mortgage payments less consistent.
Variable interest rates provide a lot of benefits because lenders often prefer this kind of loan. You can make extra repayments, enjoy more features, and will find it easier to switch loans. However, a variableinterest rate can make your monthly budgeting more difficult. Some borrowers experience mortgage stress when the interest rate spikes suddenly.
How much you pay in interest depends on the amortization period of your home loan. Borrowers usually save more money on variable interest rates than on fixed interest rates, but if the amortization period is long, variable interest might end up being more expensive.
Study the interest rates carefully and look at different options during your home loan comparison process. This will help ensure you find the best deals. If you want to know more, don’t hesitate to contact us at Home Loan Comparison on 0419 856 669.