The Battle of the Borrowers
When purchasing a home, every buyer is presented with two distinct choices – whether to take out a fixed rate or a floating rate home loan. It’s a choice that never fails to drive the more dogmatic proponents of either side into a bit of a frenzied debate. Amidst much desk thumping and wild gesticulating, the fixed rate fanatics will no doubt point out that it’s madness to hinge your monthly payments to the whimsical, fluctuating nature of the housing market. The fans of floating rate home loans however, will reply passionately that the rates may indeed go up, but they will inevitably come down again too, and when they do you stand to save a small fortune in lower interest payments. The impartial home buyer could well find themselves being caught in a tug of war, being pulled to-and-fro by both sides, but who really has the better case? To get to the bottom of this battle of the borrowers, it’s a good idea to take an impartial stance and weigh up the facts objectively.
“Somebody is sunbathing”. Battle – Schlacht in Grossgoerschen (Lützen) 1813 (10) by gynti_46, on Flickr. This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
Fixed Rate Home Loans
A fixed rate home loan, as the name implies, is a loan where the interest rate remains the same regardless of the fluctuations in the market. How it works is that interest rates on these loans are pre-determined and then ‘fixed’ at the time you accept the loan offer. It’s a lending option that is particularly appealing to borrowers who value the stability and the security that comes from being able to maintain a predictable budget every month. This is because for the duration of the fixed loan term the rates stipulated in the agreement will not change, regardless of how the market behaves. So, should the interest rate suddenly spike, borrowers who opted for a fixed rate loan will have the privilege of passing through the storm unscathed whilst watching their floating rate compatriots frantically attempting to bail the rising waters of costly interest payments from their sinking ships, or rather, homes. But if the interest rate dips, well then the folks in the floating rate boats are going to be having a party, and the fixed rate people won’t be invited.
Generally, the best time to opt for a fixed rate home loan is if interest rates are currently low and look set to rise in the near future. This way you can secure a low interest rate and hold it there for as long as possible. Also, if you’re going to be making cash payments toward your mortgage then a fixed rate is generally more favorable as it enables you to budget more accurately – there’s nothing more fatal to a well-planned budget than unpredictable payments being deducted from your bank account every month.
Lastly, fixed rate home loans are a safer option for anyone who simply can’t afford any unforeseen financial hiccups in the future. It is one thing to have six months’ worth of emergency savings set aside, but it’s quite another to have those savings unexpectedly wiped out in half that time by interest rates that climb too high.
Floating Rate Home Loans
A floating home loan is one where the rates fluctuate as the market fluctuates. When the market is up your rates are up and when the market is down your rates are down right alongside. Generally, floating (or variable) home loans are preferred by borrowers who are a little more secure in their finances and who are better able to weather the sporadic ups and downs of a volatile market.
An ideal time to opt for a floating home loan is if interest rates look set to drop. If you get in at the right time you could enjoy considerably lower repayments which will allow you to effectively pay off your loan faster. This coupled with being allowed to make lump sum payments of any amount without being handed some hefty penalties in return, make floating home loans a very appealing option. What’s more, you always have the option of ‘fixing’ your rate at any time which makes them the far more versatile of the two options.
On the downside however, there is no guarantee that the rate will dip or even stay at fixed loan rates. Should it rise above the fixed rate you could very soon find yourself, budget bucket in hand, bailing frantically to stay afloat financially.
In the end, whether you opt to play it relatively safe and stable and go in for a fixed rate home loan, or decide instead that you’re savvy enough to be able play the market to your advantage by taking on a floating rate home loan, the decision is up to you. Both types of loan have their respective advantages and disadvantages and it really all comes down to the specific needs and capabilities of the borrower as to which type is the best choice.
