Fixed vs. Variable Rate Mortgages:
Fixed and variable rate mortgages differ primarily in how the interest rate on the loan is structured, affecting how Reserve Bank of Australia (RBA) decisions impact these loans.
Fixed Rate Mortgages: A fixed rate mortgage locks in an interest rate for a specific period (e.g., 1, 3, 5, or 10 years), guaranteeing the same monthly payment throughout this term. This setup offers predictability in budgeting and protection against interest rate increases.
Changes in the RBA's cash rate do not affect the interest rate of a fixed-rate mortgage during the fixed term. However, at the end of the fixed period, the rate will revert to a variable rate, which could be higher or lower depending on the prevailing economic conditions and RBA policies at that time.
Variable Rate Mortgages: Variable rate mortgages can change at any time, reflecting shifts in the lender’s interest rates, which are influenced by the RBA’s cash rate. This means monthly payments can increase or decrease based on economic conditions and RBA decisions.
Borrowers with variable rate mortgages feel the impact of cash rate changes almost immediately. A decrease in the cash rate can lead to lower interest rates and monthly payments, providing more disposable income. Conversely, an increase means higher payments, potentially straining finances.