Choosing the right home loan: Fixed versus variable rate

23.12.13If you’re considering purchasing your first home in the coming months, now would be the time to do so. With the official cash rate currently sitting at such a low level, securing a competitive home loan right now would be a great move to make.

However, regardless of whether you’re a first home buyer or a seasoned investor, there are a wide range of different terms to wrap your head around. The jargon and intricacies of the mortgage market can be difficult and confusing.

Finding the right type of loan is imperative to have a stress-free repayment period so you can enjoy your homeownership status.

There are two basic types of home loan, each with a different characteristics and applications –  a fixed rate home loan, and a variable rate home loan.

The basic difference between the two is their relationship with the interest rates, and how fluctuations in the economic market will affect your repayment schedule.

A fixed rate home loan is secured at a particular interest rate for a set period of time, which is usually between three and five years. During this time, the amount of interest you’re charged on your loan will remain steady, making your repayments uniform for that period of time.

These often offer a degree of support that first home buyers could appreciate, meaning they can begin setting aside their repayment amounts and getting into the swing of things easily.

On the flip side, a variable rate home loan is has an unsecured interest rate and plays off changes in the economic market. That means that when the cash rate is low, the amount of interest you pay will also reduce.

However, the opposite applies too, with increases in the market being reflecting in higher interest rates and – potentially – larger repayments. These could be great for seasoned investors, or people with a great awareness of economic intricacies.

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