As a first-time homebuyer in Australia, you can choose between a fixed-rate loan and a variable-rate loan. Home loans with fixed interest rates don’t fluctuate with market rates, while those with variable interest rates do. After an initial fixed-rate period, typically the first one to five years of a mortgage’s term, the interest rate on a fixed-rate loan reverts to the market rate for similar loans.   Benefits of a Fixed-Rate Mortgage – Repayment schedules that can be relied upon. Hedge against inflation and rising interest rates. Cons of a Fixed-Rate Loan –  There is no gain even if rates go down. There may be penalties if you choose to prepay your loan before the end of the fixed term. More hassle if you decide to switch to a different lender. Reduction in possible account reversals and offsets. There is no option for making additional payments (capped). A home loan with an adjustable interest rate is one that changes periodically. If you have a variable-rate loan, your interest payments will fluctuate with the market rate of interest. Simply put, if interest rates rise, so should your mortgage payments, and vice versa if rates fall. The inner workings of a mortgage loan with a fluctuating interest rate. Mortgage rate is 5% Amount is $500,000 Term is 20 years Principal plus interest type loan Monthly repayment is $3299.78 Mortgage rate is 5.5% Amount is $500,000 Term is 20 years Principal plus interest type loan Monthly repayment is $3439.44 By an increase of 0.5% in interest rate, the Monthly payment goes up by $139.66. Total interest payable goes up from $291,946 to $325,464 Your mortgage servicer can make changes to your variable rate whenever they see fit; they are not required to, for example, pass on the full impact of a cash rate cut by the Reserve Bank of Australia (RBA), though they usually do so to avoid negative press and maintain competitiveness. Home loans with adjustable interest rates: Advantages of a Variable-Rate Loan Potential for making supplemental payments (uncapped). There are no early termination or other charges. If interest rates go down, you will have to pay less money in interest. Access to redraw and offset facilities. Easier transition between loans and between loan types. Cons of a Loan that Can Be Repaid in Parts It’s possible that interest rates will skyrocket. What goes around comes around with your repayments. What to consider when deciding between a fixed-rate and variable-rate mortgage. There are benefits and drawbacks to both fixed and variable rate mortgages. To avoid the stress and unpredictability that comes with interest rate hikes, it’s wise to consider a fixed loan that can stabilize your repayment schedule, even if only temporarily. We seem to have entered a period of rate increases, so a fixed-interest loan may seem like the best option if you’re a first-time homebuyer who is feeling risk averse. However, if you opt for a fixed loan, your flexibility will be severely curtailed due to the loan’s inflexibility, and you’ll have to pay penalties and fees if you decide to pay it off much earlier. If you need the equity in your home for an unexpected expense, you won’t be able to access it through a home loan redraw or any other means. In contrast, a variable loan does not limit your ability to prepay your mortgage like a fixed rate loan does, so you can pay as much extra principal as you’d like and are less likely to incur early repayment fees. The flexibility of having access to your mortgage funds whenever you need them, as well as the potential for lower interest rates if the market rate drops below your fixed rate, are both advantages. But when interest rates are unrelenting and keep heading in the wrong direction, your payments will automatically adjust downward as well. When deciding whether or not to go with a fixed-rate loan, it’s helpful to keep in mind the benefits of a split loan, which combines the advantages of both types of loans. To know how the recent RBA cash rate hike will impact your repayments and to check for a possible competitive rate, call 1300 438 273