Whether to opt for a fixed or variable home loan is one of the most common concerns borrowers have. Each type of loan has different benefits, meaning there isn’t a one size fits all solution for everyone.
Whether you should opt for a fixed or variable rate home loan depends upon your financial position and which loan you feel most comfortable with.
Fixed rate home loans: the pros and cons
A fixed rate home loan is one that allows you to lock in an interest rate for a fixed term of one to five years. When this period has finished, you can then decide whether you would like to switch to a more flexible variable rate loan or commence a new period of fixed interest rates.
While fixed rate home loans don’t offer a lot of flexibility in terms of extra repayments or lump sum contributions – as you may be charged significant break costs for doing so – they do offer the security of predictable repayments that you can plan for over the fixed term.
This option is great for people who are on a tight budget and may not be able to manage if interest rates rise. The flipside of this, however, is that you miss out on interest rate drops.
Having said that, many lenders calculate their fixed rates based upon what they predict will happen to the cash rate. If they anticipate a rise in the cash rate, they’ll generally set the fixed rate higher than the variable rate. The reverse applies when they predict the cash rate will fall.
Before fixing rates, determine how long you intend to own the property for. If you fix your loan for longer than the period of time you plan to have the property, you may be charged substantial early exit fees.
Variable rate home loans: the pros and cons
A variable rate home loan fluctuates depending upon the cash rate, which means your repayments can vary from month to month.
A drawcard of variable rate home loans is access to features such as low entry and exit fees, and offset and redraw facilities. These facilities offer greater flexibility and are useful for borrowers who may wish to make extra repayments or use their savings to offset the interest calculated on their loan.
The flexible set-up of variable rate home loans also means that borrowers aren’t penalised for making extra repayments or lump sum deposits. These loans are also more accommodating to borrowers who may wish to access additional finance down the track or switch loans to pay for renovations.
The most common concern regarding variable rate home loans, however, is the uncertainty of interest rate rises.
Enjoy the best of both worlds with a split rate loan
More borrowers are choosing split rate loans, which allow you to fix part of your home loan and leave the other at the variable rate. You can nominate how much of the loan is fixed and how much is variable. With a split rate home loan, the fixed part of your loan will give you stability, but you also have access to the flexibility and features of the variable component of the loan.
Fixed vs variable home loans, in summary
- Variable rate home loans are more flexible and offer more features
- Fixed rate home loans offer the security of predictable payments
- Fixed rate home loans are less flexible and have fees and charges for extra repayments
Choosing which loan is best for you
- Compare the differences between the current variable and fixed rates
- Work out whether your financial situation is likely to change and how this will affect your ability make repayments
- Assess whether you could comfortably manage if interest rates were to rise
- Consider what home loan features you actually need
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