Whether you’re a first-time home buyer or you have already made several moves up the property ladder, home loan interest is always a big consideration. This interest is a big component of the total cost of the loan, translating to many thousands of dollars over the full term, so it makes sense that you want to get the best deal. But what’s the best way to go about this? Get a variable rate loan, which might fluctuate over time, or lock in the current interest rate on a fixed rate mortgage?

Let’s take a look at some of the advantages and disadvantages of this latter option, weighing up the pros and cons of a fixed rate mortgage.

The Advantages of a Fixed Rate Mortgage

We’ll start with the advantages – what are the plus points for this type of home loan?

Simple Financial Planning

The main advantage of this type of mortgage – and the defining feature – is that interest rates are fixed. This means you know precisely how much interest you’ll need to pay over the full duration of the mortgage. In other words, you’ll be able to plan your financial future in the long term, safe in the knowledge that the cost of servicing the loan won’t change.

The Opportunity to Lock in a Good Interest Rate

Interest rates are one of the key factors that influence property buying decisions. Potential buyers might not feel confident in taking out a mortgage when interest rates are high and may prefer to start the buying process during a period of low interest. But these rates are subject to change – if you take out a mortgage when rates are low, how can you be sure that you won’t be exposed to increased costs if they start to climb again? By taking out a fixed rate mortgage and locking in that low interest.

Immunity from Economic Fluctuations

A property tends to be the highest-value asset most people will purchase during their lifetimes, and servicing a mortgage is one of the biggest regular costs they face. When interest rates increase, so do home loan servicing costs, which can put a real strain on finances. This is a big plus point for a fixed rate home loan – you’ll gain immunity from potential interest rises in the future.

Pros and Cons of Fixed Rate Home Loan Mortgage Sydney Brokers

The Disadvantages of a Fixed Rate Mortgage

Of course, there are downsides too – we’ll break down the key disadvantages below.

Costs May Be Higher

The interest and the principle are not the only costs you need to consider. You’ll also need to think about the fees attached to your mortgage. With a fixed rate mortgage, these fees may be higher than they would be on a variable rate loan. Prospective home buyers need to make careful calculations to ensure that a fixed rate mortgage really can provide the best deal.

Cannot Benefit from Interest Falls

The fixed rate of interest is a key advantage, as mentioned above, but this can be a double-edged sword. You see, interest rates can fall as well as rise – if this happens, and you are tied in to a fixed rate mortgage, you won’t experience any benefit. If on the other hand you have a variable rate home loan option, you could see your interest rates decreasing in line with this fall.

Very Little Short-term Flexibility

Because of the higher fees and charges associated with this type of mortgage, you may lose out if you decide to sell or refinance after only a few years. First-time home buyers might be focused on taking their first steps on the property ladder, but if their situation changes in a few years and they wish to upgrade their property, they may need to take out a new mortgage. This can be difficult on a fixed rate mortgage and can result in financial losses. The locked-in nature of a fixed rate loan can be a big disadvantage for those who need a bit more flexibility.

Finding the Best Home Loan for You

Here at Sydney Brokers, we help first-time home buyers and more seasoned property purchasers as they seek the best home loan for their needs. Reach out to our team today and tell us more about your situation. We’ll assist you with a range of options from reputable providers, helping you find the ideal loan product.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.