To fix or not to fix - that is the question. With record low interest rates across the board, it can be tempting to either fix your home loan, or go the variable route. However, which one is best? That depends on your circumstances and partly what you’ll think the market will do in the future.
Fixed vs Variable Home Loans - Which is Better?
There are a few things to consider when it comes time to shop for a home loan, and one of the biggest talking points on everybody’s lips tends to be whether it’s worth fixing your home loan, or opting for the traditionally more popular variable option.
Fixed Home Loan Pros
The most obvious benefit to a fixed loan is that it’s… well… fixed. This means that the lender can’t change the rate in the time you’ve fixed it for, while also providing you peace of mind.
‘Peace of mind’ means you’ll know your exact monthly payment for a set period and this won’t change. This can be useful for a myriad of home owners, whether you’re a first home buyer looking to find your feet, or a refinancer looking for certainty.
Another pro is that fixed loans, especially nowadays, can often have lower interest rates than similar variable home loans.
Fixed Home Loan Cons
Like with most things in life, there’s no such thing as a free lunch. One of the main cons of a fixed loan is that it’s essentially a bet you make with yourself that interest rates won’t reduce further over the fixed period. If they do, then you could be locked into a rate that is then uncompetitive. However, with interest rates at record lows, the capacity for both the Reserve Bank and institutions to cut further could be limited.
By ‘fixing’ you’re also locked in to that rate, and if you break out of it, you could be subject to break fees. Break fees are usually a calculation based of the lender’s wholesale funding rate, and could amount to thousands.
Another con is that in many cases, a fixed home loan is less flexible than a variable one. By this we mean that a fixed loan might not come with features such as an offset account or the ability to repay extra. One way to navigate this is to ‘split’ your loan into part variable, part fixed, however, loans.com.au’s fixed home loan does allow for extra repayments without having to split.
Variable Home Loan Pros
Variable home loans have traditionally been the more popular option in Australia. The sheer number of variable rate home loans available on the market means there could be something for everyone. One of the biggest pros of a variable home loan is its flexibility.
Want an offset account? That’s usually no problem. Want a redraw? That’s available too. Want card access? We can order you one.
Variable home loans have also often featured lower interest rates - especially the comparison rate - and lower fees. Take loans.com.au’s ‘Smart Booster’ home loan. With a one-year introductory rate of 1.99% p.a., and a comparison rate* of 2.47% p.a., the home loan has no application fees or ongoing fees, with unlimited free redraws. After the one year introductory period ends, the rate reverts to 2.48% p.a..
Variable Home Loan Cons
One of the biggest cons with variable rates is that they are subject to rate changes thanks to market forces. This means that one year you could be paying X per month, and the next you could be paying Y per month. However, things might not move so fast - in 2020 the Reserve Bank cut the cash rate twice, which was one less change than in 2019. Before that, the cash rate remained unchanged for two years.
As you might have guessed, your variable loan is is largely contingent on what the Reserve Bank does to its cash rate, and how your lender reacts to that. With the cash rate at a historic low, the capacity to cut further is getting tighter. However, it looks like we could be in a low interest environment for quite some time.
Can’t decide on what type of home loan is best for you? Speak with one of our home loan specialists today to go through your options and to get pre-approved for when you’re ready to get a home loan.