5 Ways to know if getting a Variable Rate Home Loan is for You

July 7, 2015

Every time interest rates fall to a new low, home owners can’t help but focus their attention on fixing their house mortgages to lock in the currently existing low interest rate. However, there is more to variable rate home loans than just having the option to switch to a fixed rate whenever you feel the need to. Although fixed and variable rate loans have their own share of pros and cons, knowing which type of loan is most suitable for your current financial situation is the first step to having a successful loan take out. So, is getting a variable rate home loan for you? Find out how.

  1. You always keep yourself updated with the latest interest rates

When your interest rate is fixed throughout the life of the loan, there is little motivation to read up market predictions. Variable rate home loans are ideal for people who want to take advantage of the lower-than-before-interest rate as the market crashes. These people can afford to be wrong with their predictions because they don’t mind paying a little extra and they know they can easily switch to a fixed rate.

  1. Your complex financial situation requires flexibility

This is common among high net worth individuals whose diverse assets require greater options, particularly when it comes to paying down home loans or any other types of loans for that matter. For instance, signing up for a variable rate loan will give you the chance to pay off your loan in lump sums without actually incurring any penalty for making early payments.

  1. You intend to complete your repayments over a short period of time

Being allowed to pay in lump sums also means the possibility to pay all of your outstanding balance within a shorter time frame. In fact, some banks offer an option of making an interest-only or principal and interest repayments for five years such as Newcastle Permanent feature-rich variable rate home loans. And who knows, by the time you have completed your repayments, the interest rate has not dramatically increased yet.

  1. You want to take advantage of the initial low interest rates to save money

Fixed-rate loans typically have a higher interest rate than the initial rate you could get from a flexible home loan. For example, while you can purchase a fixed rate mortgage with 6 percent interest rate, you actually can get a much lower interest rate than that through a variable rate mortgage. The amount of savings you were able to keep until the interest rate rises again might be enough to compensate for the increase. So enjoying a win-win situation is also possible with flexible home loans.

  1. You want to get annual or lifetime caps

Just because you’re getting a flexible home loan does not mean you won’t be able to protect yourself from the volatile market situations. Caps are a great way of limiting interest rates from increasing beyond a certain level you have set for a year or throughout the life of the loan. This means, you also have some sort of control over how much interest rate you want to pay off during a certain period of time.

All in all, getting a variable rate home loan could be worth it if you predict and believe that interest rates will not increase in the next two years, and dealing with the potential risk that may come with it is manageable to you. Make sure to stay in touch with your lender when there’s a need to adjust your payment terms and mortgages.