When you are planning to build a house, the majority of us will have to look into getting a mortgage or loan. The general idea is that beyond the amount you take out for the loan, you will also have to pay interest on the money. The interest is the way by which the lender benefits from offering you the credit.
There are different ways to calculate the interest for loans. The lower the interest rate, the better the deal. But you should read into the fine print before deciding on any loan, as it could contribute significantly to your financial position.
There are mainly two types of loans; variable and fixed interest. Take a look here in detail to understand which would work better for you.
Variable Interest Loan
As the name suggests, variable interest loans offer an interest that fluctuates over time in line with the general interest rates. The interest would increase or decrease depending on the cash rate set by the Reserve Bank of Australia (the RBA).
Also known as floating rate loans, the starting interest rates for this loan usually starts low compared to fixed-rate mortgages, but the payment amount can vary over time. Custom Home Builders Brisbane gets you 3 competitive quotes from the most trusted builders.
How does a Variable Loan Work?
RBA officially meets on the first Tuesday of every month to consider and discuss the different economic indicators that affect the interest rate and decide whether a change is required in the best interests of the economy of Australia.
After a decision is made, it is announced, and the lenders and other financial institutions adjust their interest rates accordingly. In theory, this is what happens. However, in recent years, banks have not always been prompt to implement the changes. Nevertheless, the rate of interest on your loan will vary as per the interest rate set by the RBA.
The main advantages of Variable loans are that you can make extra repayments, that would save you interest and help to pay off the loan sooner. A few banks also allow redraws with variable loans, and it is also easier to switch loans for a better deal. If the interest rate decreases and you pay the same monthly amount, it could lead to a substantial amount in the principal amount of your loan being paid off. With a vetting standard that satisfies only the pickiest, Renovation Builder Brisbane ensure that your expectations will be met, if not exceeded.
Fixed Interest Loan
Fixed rate loans come with an interest rate that is fixed throughout the course of the loan. This means that you pay the same interest rate every month and you will know how much interest you will have to pay every month. Most loans usually come with fixed rates. Choose the right Brisbane builder for your home.
How does a Fixed Interest Loan Work?
A fixed loan interest could have a term with fixed interest anytime between one to thirty years. After that period, you can choose for a variable interest or negotiate another fixed interest term.
The certainty of knowing the payment amount allows you to plan your budgets properly is one of the pros of this option. At the same time, there are chances that you would be losing money while paying higher interest if the current rate is lower. Finding the right finance broker can literally save you tens of thousands.
The downsides also include the limits on extra repayments or even the possibility of no extra repayments. The redraw facility is also not offered with a fixed rate loan, and even if you pay off the loan within the term, you might have to pay a break fee. This type of mortgage loan is not recommended especially if you are planning to sell the house in the short term.
How to Choose?
For choosing the right option for you, there are a number of factors to consider. Starting from the size of the mortgage, the loan duration, and individual circumstances are all contributing elements.
Most importantly the prevailing interest rate and a general understanding of the current economy is necessary to make the decision. It is not possible for everyone to predict how the economy would be functioning in the future. That is why it would be best to consult building brokers Brisbane to help you with the decision. Choosing the right building designer is important as it can make or break your project.
Generally, if the interest rates in the market are low but are predicted to rise in a short time, it would be best to go with fixed interest loans. Fixed rates are determined by not only the current interest rates in the market but also based on the length of the loan term. With a rising interest rate, locking in a fixed rate loan would protect you against the higher rates.
On the other hand, if the predictions show that the market rates would decline soon, then a variable rate loan might be better. It gives you a little flexibility and allows you to pay more on the payments and close off the loan sooner. Our house and land packages Brisbane got you covered from $50K renovations to $5M projects.
Splitting the Loan
There is also a third option to opt for a 50/50 combination of both types. You can negotiate for one choice for a term and switch to another. Splitting your home could also be done by nominating a proportion for a fixed rate and other portion as a variable. It offers both the certainty of fixed loans and flexibility to make extra repayments on the variable part. This provides more flexibility and a chance for you to see how the market is performing in the long term.
Mortgage loans or construction loans have always been in the category for low-interest rates. A term for 30 years with a fixed rate would secure affordable payments. If the homeowner is looking to sell the house or refinance the mortgage in the interval of a few years, a variable rate would be beneficial as the term is short.
Your Brisbane business broker can recommend you the term to choose for the mortgage loan. As for a long term investment can a slight difference of 0.25% on an interest rate could mean thousands of dollars. Get in touch as one of our friendly team members will get back to you within 48 hours.
Making a decision as big as this is dependant on other factors too. You need a fine team with you throughout the process to advise you. If you are in the lookout for builders, contact TrustCo to get started.