I am regularly asked by clients a number of similar questions about fixed and variable home loan products. Choosing a fixed or variable home loan product is often a big decision to make
What is a fixed home loan?
A fixed rate home loan means the rate of interest charged does not change for an agreed term, usually 1 - 5 years. This means your regular home loan repayments stay the same during the agreed term.
A fixed rate home loan can provide greater certainty, as it means you can confidently budget for other expenses, knowing exactly what your future repayments will be.
There are a few things to consider when taking a fixed interest home loan:
- If Interest rates drop you will be locked at a higher rate.
- Look for fixed interest products with some flexibility - such as the ability to make additional repayments.
- Be aware that there may be break costs should you need to exit a fixed rate loan.
If you would prefer some degree of certainty, a fixed rate loan is certainly a reasonable option to consider.
What is a variable home loan?
A variable rate home loan is where the interest rate charged on that loan can change over time, due to market conditions or at the discretion of the lender. If interest rates go up, your repayments will also follow suit. Conversely, if your lender decides to cut your rate, you will enjoy the benefits of a reduced minimum repayment amount.
There is generally more flexibility with a variable rate home loan. This includes features like unlimited additional repayments, redraw facilities and offset accounts. These home loan features allow you to minimise interest costs and potentially shorten the term of your loan
If you are comfortable with planning and budgeting to take account of fluctuations to interest rates, the flexibility of a variable home loan may suit you.
Can I have both?
Yes! A split home loan is structured to effectively hedge your bets on future interest rate movements. This means you can secure a portion of your loan at a fixed rate, whilst keeping the remaining portion variable. You even get to decide the number of splits, the term of each fixed rate split, and what amounts you would like to set as fixed or variable.
Ultimately, the decision is up to you. But make sure you do your research, and also ask your broker how different products work and how these product might suit your needs.
Mortgage Choice have put togther a video comparing Fixed vs.Variable rate home loans. Please watch for more information and call your local mortgage broker Leonard on 0420 544 268 to discuss your next home loan.