Financing your first home just got flexible
'Should we buy or rent?', ask Julie and Charel, a young couple in the process of making life's big decisions. Having recently completed their…
Fixed rates mean transparency and stability, because they do not change much throughout the loan term in which the mentioned rate is valid. This means you know the monthly instalments in advance, which makes it possible to set your budget in stone and predict outgoings over the long term.
In the event of total or partial early redemption, this formula may entail the payment of an early-repayment fee and an indemnity.
Variable rates offer greater flexibility, because they allow for early redemption at any time without charges. Whereas the lent funds are paid into the customer’s account in one go with a fixed-rate loan, variable-rate loans are normally released bit by bit as the work or project progresses. In other words, interest is only owed on the portion of the loan already taken up.
However, the rate changes with the market rate and does not allow you to plan the expenses linked to your housing loan in advance. Monthly repayments could jeopardise your budgeting if rates increase.
If you need to borrow over the long term but are still planning to carry out other projects in the years to come, fixed rates offer greater stability and predictability. Variable rates, however, could be useful for short-term or smaller projects.
If you are one of those people who cannot make up their mind, you should know that there is a type of hybrid housing loan that combines fixed and variable elements. With hybrid loans, there are no early redemption charges for the second part of the loan. Plus, since you pay back the majority of your interest over the first few years, you could still do well if the rate subsequently changes. In any event, you must always take into account your employment status and personal circumstances when taking out a housing loan.