Are you looking for a good deal on a home loan? Then you have to pay more attention to the interest rates. Home loans are long-term debts, hence, even a slight difference in interest can add up greatly over time. There are different options and features of home loans, that offer the flexibility of the loans or even let you pay off faster. There are home loan options that could cost you more, while others may cost less, so before taking a home loan option make sure they’re worth it.

There are several home loan options available. These options include interest rates and payment types. In today’s article, I will be focusing on the 2 main interest rates and how they affect your home loan. 

Generally, when you go for a home loan, you are given two choices: a fixed interest rate or a variable interest rate. In a fixed interest home loan, your interest rate is fixed for a specific duration, usually between 1-10 years. During this period your interest rate is fixed, both the interest rate and required payments will remain the same. While for a variable interest home loan, the interest rate can change at any time. Lenders may increase or decrease the interest rates attached to your loan due to several factors. If the rates go up, your required minimum repayment amount will increase and if it goes down, the repayment amount will decrease. Are you still confused about which interest loan is better for you? Worry no more. In today’s post, you will find everything you need to know about fixed and variable rates in other to help you make the right choice.

Fixed-Rate Mortgages

Pros

• Rate Rise will not affect you: If you anticipate an increase in interest rates over the next 1 to 5years, then sealing in a fixed-rate mortgage deal today could save you a ton of money on repayments in the future.
• Set and forget: Selecting the fixed interest rate option means that the amount of your repayment remains constant throughout the loan duration (usually between 1 to 5 years). Having a fixed loan repayment amount will make it easier to plan and manage your cash flow. 

Cons

• Limited Flexibility: When you opt for the fixed-rate home loan, your ability to pay off the loan faster is restricted. You’ll need to pay a significant break fee if you wish to refinance, sell the property or pay off the loan in full before the home loan fixed date has ended.
• Lesser features: There are many desirable features that come with variable rate mortgage, however, those features aren’t available in fixed rate mortgages. In fixed rate mortgage, borrowers wont be able to redraw any funds over the fixed term.
• Rate cuts will not impact you: Once you’ve opted for a fixed-rate mortgage, you will not be able to benefit from any cuts made by the lender to their home loan rates over the fixed term.

Variable Rate Mortgages

Pros

• Repayment Flexibility: In variable-rate loans, you are given a wider range of repayment options which includes the ability to pay off the loans faster without any interest rate break costs. Some variable-rate mortgages can include features like redraw facilities that can aid in reducing the loan balance you pay interest on while giving you access to surplus funds.
• Easy to Refinance: With variable rate mortgage, you can easily switch to a different lender or home loan product if you discover a better deal elsewhere without attracting a break cost.
• Less pay if the rate falls: If you opt for the variable rate mortgage, then you can enjoy a lesser pay if the rates fall. Lenders may cut rates due to a variety of reasons, usually in response to diminished funding costs.

Cons

• More pay if the rate rise: Lenders may increase the variable interest rate at any time which means you will have to pay more. Variable-rate mortgages usually fluctuate throughout the loan period.
• Uncertainty in Cash flow: Because the interest rates can change at any time, it makes it very difficult for borrowers to predict cash flows during the loan term. Hence, you will have to make use of different loan features available on variable rate mortgages, including offsets and redraw facilities to help smooth out the cash flow in case of unexpected events.