Fixed vs. flexible interest mortgage – How to choose the best one
Are you looking for a home loan but cannot make up your mind whether to go for fixed interest mortgages or adjustable/variable rate mortgages? Go through this article to know about the pros and cons of both the types that will help you to make a decision.
The objective and the characteristics of a mortgage loan is more or less same everywhere regardless of whether you are taking out a home loan in the US or Australia; however, adjustable rate mortgages are referred to as variable/flexible interest mortgages in Australia.
Pros and cons of fixed interest mortgages
As the name suggests, in a fixed interest mortgage, you need to make the monthly payments at a fixed rate of interest throughout the loan term.
Following are the pros and cons of fixed interest mortgages.
Pros:
The interest rate on a home loan remains fixed throughout the loan term.
It is easier to make a budget plan and control expenses as the monthly payments remain fixed.
It is relatively much easier to understand; so, it is better for a first-time homebuyer.
Cons:
It can be sometimes quite expensive for the borrowers.
The borrowers cannot take advantage of falling rates.
You’ll have to refinance your home loan in order to take the advantage of falling rates; in this process you’ll have to pay closing costs.
Pros and cons of flexible interest mortgages
A flexible interest/rate mortgage is a type of home loan where the interest rate varies as per the financial index that it is based on. It is probably the best loan type in Australia due to its flexibility, low fees and comparatively moderate rate of interest.
Pros and cons of flexible interest mortgages are discussed below.
Pros:
Comparatively lower initial rate of interest; so, the buyers can qualify for a relatively higher loan amount.
The borrowers can take the advantage of initial low rates and then move out of the home.
You can take the advantage of falling interest rates.
Cons:
The interest rates may rise over the loan term, which in turn, increases monthly mortgage payments.
It is sometimes difficult to understand especially for the first-time homebuyers.
It is difficult to manage personal finance as the future monthly payments are quite uncertain.
Factors to consider while choosing an option
It is advisable that you consider the following factors in order to decide whether a fixed interest mortgage or a flexible interest mortgage will be favorable for your financial status.
How frequently the rate gets adjusted – In some flexible interest mortgages, the interest rate gets adjusted every year whereas, in some home loans, the rate gets adjusted after every 3-5 years. You can go for a flexible rate home loan that gets adjusted over a staggered time frame, such as, after every 3 or 5 years.
How long you plan to stay in the house – You can take out a flexible rate mortgage if you plan to move out of your home before the flexible rate period begins.
It is advisable that you should also weigh the pros and cons in order to decide whether fixed interest mortgages or flexible interest mortgages will best suit your financial condition in the long run.
Keyphrase: fixed interest mortgages, flexible interest mortgages
Description: Check out the pros and cons of fixed interest mortgages and flexible interest mortgages. Know the factors to consider while choosing the best option for you.
