Fixed vs Variable Mortgage: Which one is right for you?
You’re finally ready to take out that home loan, but now you’ve hit a fork in the road. Do you go for a fixed or variable interest rate for your loan? Choosing between the different types of loans is not an easy feat. To make an informed decision, you need to understand the difference between the two interest rate types and what they can do for you.
What’s a fixed rate home loan?
A fixed rate home loan is a type of finance with interest rates that are guaranteed not to change for the entirety of the fixed term, typically between one and five years. This means the repayment amount on your fixed rate home loan remains the same, as well.
At the end of your fixed term, you can choose to re-fix your loan at the new offered rates or roll into a variable rate loan.
Benefits of a fixed rate home loan
The primary benefit of taking out a fixed-rate home loan is the greater sense of financial certainty it provides. Having a fixed interest rate can be helpful, particularly for first-time homeowners who are new to making regular repayments.
Under this arrangement, the interest on your mortgage is locked into the rate that you agreed to for a set period. Even if your lender increases interest rates during that time, your fixed rate and repayments will be unaffected.
At loans.com.au, we offer the ability to ‘lock in’ your interest rate for fixed rate home loans (for a $350 rate lock fee). Since interest rates could change between your initial application and the loan settlement, locking in a fixed rate assures you that you’ll get the rate you initially signed up for.
Drawbacks of a fixed rate home loan
The certainty of a fixed home loan allows you to set an accurate budget. However, the inflexible nature of this type of loan is both a blessing and a curse.
If interest rates are dropping around you, your fixed rate will stay the same. This means you could pay more interest over the life of the loan than you would if you had a variable rate home loan.
Penalties for making significant additional repayments can be harsh, as well. Fixed-rate mortgages typically do not offer features like a redraw facility or offset sub-accounts. In addition, if you adjust your loan or sell your home within your fixed term, you may also have to pay expensive break fees.
What is a variable rate home loan?
A variable rate home loan’s interest rate changes over the life of the loan. If your rate changes, your repayment amount will do the same. Some factors that affect your loan’s interest rate include the lender’s funding costs, the Reserve Bank’s official cash rate, and market changes.
Benefits of a variable rate home loan
The main advantage of a variable interest rate is its flexibility. With a variable rate loan, you can make extra repayments towards your mortgage without paying penalty fees. This can help you save more and pay off your loan sooner.
Variable rate home loans typically offer features like offset sub-accounts, redraw facilities, and free unlimited additional repayments. By using these features, you could cut down the length of your mortgage and reduce the overall interest paid, giving you a better return on your investment.
Drawbacks of a variable rate home loan
Borrowers with a variable home loan can also take advantage of rate cuts. However, this also means that when rates are up, so are your home loan repayments.
Because variable home loans are often tied to the cash rate, the amount of interest you need to pay is at the mercy of wider economic conditions outside of your control. Your required repayments will probably fluctuate throughout your mortgage term, making it challenging to set an accurate budget.
Fixed rate vs Variable rate: Which should you choose?
It depends on what you want out of your home loan. If you’re looking for predictability and stability, opting for a fixed rate home loan could be best. However, if you want more opportunities to save and pay off your home loan faster, a variable rate home loan can give you that.
Here’s a breakdown of the fixed rate and variable rate home loans from loans.com.au:
| Fixed Rate Home Loan | Variable Rate Home Loan | |
|---|---|---|
| Interest Rate | The same rate for the whole fixed term period. The fixed term can be renewed at a new rate. | Changes throughout the life of the loan depend on external market factors and lender funding costs. |
| Loan term | 25 to 30 years | 25 to 30 years |
| Repayments | The same throughout the fixed term. Repayment frequency can be weekly, fortnightly, or monthly. | Could change depending on the interest rates. Could change depending on the interest rates. Repayment frequency can be weekly, fortnightly, or monthly. |
| Features and fees | No free additional payments, offset sub-accounts, or redraw facilities. Can make additional repayments of up to $10,000 per fixed year. | Usually offers offset sub-accounts, and/or redraw facilities. Allows unlimited additional repayments for free without incurring fees. |
| Pros | Predictable repayments make it easier to budget. The home loan won’t be affected by rate increases. | If interest rates go down, so does the home loan rate and repayment amount. More flexible and offers useful loan features. |
| Cons | There's limited flexibility, and it doesn’t offer access to useful loan features. | The unpredictability of rate changes can make it hard to budget and manage the home loan. |
Not sure which to choose? Let our lending specialists help!
Our friendly lending specialists are more than happy to assist you in choosing the perfect home loan for you. Arrange a call with them today or get in touch by calling 1300 963 866!
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
