Considering home ownership? Buying a home is an exciting milestone and, for most people, one of the biggest investments they’ll ever make. Among the many decisions along the way, you’ll need to choose the best home loan for your circumstances. Here we weigh the pros and cons of fixed, variable and revolving-credit home loans to help you choose. (This is general information only – seek advice tailored to your situation.)
Why choose a fixed home loan?
A fixed loan is ideal for those who want stability. The interest rate stays the same, so you always know exactly what your repayment will be, which makes budgeting easy and removes the risk of paying more if rates rise. The downside is that fixed rates tend to be higher than variable rates, so if rates fall you may end up paying more over the long term.
The pros and cons of a variable home loan
A variable rate rises and falls with market conditions. Because variable rates tend to be lower than fixed, they suit borrowers with a stable income who are comfortable with some risk – especially if they only plan to own the home for a few years – and the lower rate lets you pay down the principal faster. A good rule of thumb before choosing variable is to confirm you could afford a rate increase of around two per cent; some borrowers pay above the minimum as a buffer and to clear the loan sooner.
The benefits of a revolving line of credit
A revolving home loan works like a large overdraft: you can spend up to a pre-approved limit at a floating rate, and repay as much as you want (or pay it off in full) at any time. It’s best to keep the balance as low as possible, as interest is calculated daily. This flexibility can be a lifesaver when unexpected expenses arise, but because you can borrow at a lower rate than most loans or cards, the risk of unmanageable debt is high. Some borrowers reduce that risk by splitting their loan between a revolving line of credit and a fixed-rate portion.
Final thoughts
Now that you know the differences, the next step is to meet a lender to find out whether you pre-qualify and for how much. Keep in mind that smaller banks and community lenders are often more willing to negotiate and can sometimes offer lower rates. Good luck with your application and happy house hunting.