Making personal finance decisions can be hard, especially when it comes to borrowing money and what type of loan you should to take out. The two major choices of a fixed or variable rate offer both pros and cons depending on what you need from your loan, what the economic conditions are like at the time and how much you can handle uncertainty with your personal finances.
A variable interest rate loan, is one where the interest rate charged on the money owed, varies as market interest rates fluctuate. As these interest rates fluctuate so do your repayments. This can be super beneficial during hard economic times when interest rates are low, however can come back to be a bad choice if the interest rates then suddenly rise.
On a variable interest rate loan it can be hard to budget and forecast your living costs when your repayments are varying all the time. If you are someone who doesn’t deal too well with the unknown, then having a variable interest rate loan could cause a lot of stress and anxiety. Markets have been extremely volatile over the last few years meaning we have seen huge fluctuations in interest rates.
A fixed interest rate loan has a fixed interest rate charged to the amount borrowed and will remain the same for the entire loan’s term, regardless of what market interest rates are doing. This means that fixed rate mortgages offer long-term stability. The timing of your loan will determine whether or not this is good. If you secure in a low interest rate just before there is rise, then this is clearly a lot better than taking a loan out when interest rates are high and they then drop. A key disadvantage to a fixed rate is there can be penalties if you wish to pay off your loan earlier than the fixed term. Obviously the key to being successful in a fixed rate loan is all about the timing in which you lock in the rate.
In the recent years we have seen huge fluctuations in economic conditions, making the fixed rate interest loans a lot more desirable, especially for home buyers. Locking in a fixed interest rate offers certainty when there are volatile interest rates in the market, giving a little peace of mind to homebuyers. When choosing a home loan, consult with the experts so you understand fully what each loan type fully entails.