Is there a catch to variable rate loans?
Regardless of whether you’re refinancing your loan or a first home buyer, one of the biggest decisions you'll have to make when taking out a loan is whether to choose a variable or fixed-rate loan.
Variable loans can give you flexibility to pay off a bit more when you have some spare cash, and usually don’t leave you with a hefty “break fee” if you have to end or change your loan earlier than expected. But there are some things you should consider when looking at a variable loan.
Why you should get a variable rate home loan
Understanding the difference between fixed and variable rates is one of the most important steps in your home buying journey. There are pros and cons for fixed and variable rates - so it’s important you work out what is right for your situation.
What goes down may go up
The biggest catch with variable loans is that the interest rate may change, whereas the rate on a fixed-rate loan won’t move for the period it is fixed. It may sound obvious, but this means that the amount you pay each month will change if the interest rate moves, which may be a surprise if you’re on a tight budget. It’s worth having a plan for repaying a home loan at a higher interest rate than the rate at which you borrowed.
An easy way to do this is to use Pepper's home loan repayment calculator. Just go to the interest rate and add another 2-3 per cent to see what your repayments will be if rates rise. If the higher repayment amount looks affordable, then you’ll have a good buffer just in case there's a rate increase.
Of course what goes up may also come down, and one of the good things about a variable loan is that your repayments may also go down if interest rates are cut.
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