Fixed vs. Variable Home Loans: Which is Best for You in Today’s Market?
When applying for a home loan, it is important to think about variable and fixed rates. Understanding each option’s advantages and disadvantages can help you make an informed decision that suits your financial goals. In this guide, we’ll discuss fixed and variable rate home loans, their benefits and drawbacks and other factors to consider.
What is a fixed home loan?
Pros:
- Rate stability – With a fixed rate, you can avoid any surprises because your repayments remain the same.
- Protection from rate rises – A fixed rate locks your repayments and your repayments will not change if interest rates go up.
- Planning with certainty – A fixed rate home loan is ideal for those people who prefer certainty in their financial planning.
Cons:
- Limited flexibility – A fixed rate will provide limited flexibility if you think you can make extra repayments because you can make extra repayments only up to a certain amount per annum or for the life of the loan.
- There is no benefit from rate cuts. If interest rates drop, your rate and repayment will not change, and you will continue to pay a higher rate, hence losing money.
- Break costs – Closing or paying off a fixed loan early can be expensive due to its associated costs.
What is a variable home loan?
Pros:
- Extra repayments – With a variable rate, you are allowed to make additional repayments without penalties, which helps you repay your loan faster.
- Lower repayments – Depending on your lender passing the interest rate cut, your loan repayments might go down as well if the interest rate goes down.
- Offset account – You can get an offset account with a variable rate to park additional funds that can offset interest against your loan.
Cons:
- Rate uncertainty – Your repayments might go up if rates go up.
- Budgeting challenges – Repayment amounts may change, making budgeting difficult.
- Potential for higher long term costs – If rates go up, you may pay more over the life of the loan.
Important things to check when choosing between fixed and variable rate home loan
1. Current market sentiment
- Keep a finger on the pulse by reading news/articles to understand if the interest rates are predicted to go up or down.
- Follow economists on various social media channels to see what the economists are predicting for the next few years.
2. Your financial situation
- Do you need certainty in your loan repayments or can you handle fluctuations?
- Do you have extra funds to park in an offset account?
- Can you make extra loan repayments every week/fortnight/month?
3. Loan term and goals
-
- If you are looking to sell or refinance, a variable home loan rate may offer more flexibility.
- A fixed home loan rate could provide peace of mind and certainty around your home loan repayments.
Fixed vs. Variable: Which One is Right for You?
| Factor | Fixed Loan | Variable Loan |
|---|---|---|
| Stability | ✅ Yes | ❌ No |
| Extra Repayments | ❌ Limited | ✅ Yes |
| Benefit from Rate Cuts | ❌ No | ✅ Yes |
| Break Costs | ✅ High | ❌ Low |
| Flexibility | ❌ Limited | ✅ High |
Split home loan: An Alternative
This loan structure allows you to divide your loan into variable and fixed splits, with two different rates for the two portions. This hybrid option provides stability plus some flexibility to make extra repayments.
Advantages of a split loan
- Splitting loans allows you to enjoy partial rate security while taking advantage of potential rate drops on the variable portion.
- You can make extra repayments against the variable portion.
- You can reduce the impact of rate fluctuations.
Fixed and variable home loans have their own advantages and disadvantages. The right choice depends on your financial situation, risk tolerance, market outlook and your financial goals. If you’re unsure, speaking with a mortgage broker can help you tailor a strategy that aligns with your financial goals.
Need expert guidance? Contact us today to explore the best home loan option for your needs!
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