Is Now the time to Fixed your Home Loan: Fixed vs Variable Rate
Choosing to go with a home loan that offers a fixed or variable rate of interest will depend on several factors, including your personal and financial circumstances.
When taking out a home loan, one of the biggest decisions you’ll need to make is what type of loan to take out. Trying to determine which home loan type is right for your individual needs can be confusing. However, to make your task easier, we take a look at the key home loan types – fixed, variable or split rate.
Key Home Loan Types – Fixed, Variable or Split Rate All home loans apart from interest-only loans have two essential factors – principal and interest. The principal is the amount borrowed, and interest is the amount paid to borrow the money. Consequently, there are three key types of home loans centred on these two factors. These being:
Fixed loans – This loan type offers borrowers a fixed interest rate. Thus, a borrower repays a set amount monthly for a specified period. Usually, periods are between one and five years. Consequently, this type of loan gives borrowers budgeting reassurance, with protection from rising rates. But, the downside is if variable rates drop, then you will pay more than needed. Plus, extra repayments get capped, and features such as offset and redraw are typically not available.
Variable rate loans – one of the most popular type of rate due to flexibility, variable rates rise and fall with the market. Alternatively, lenders can make independent rate rises. Hence, borrowers will pay varying amounts of interest under their set rate. Some borrowers find this concerning, while others welcome the freedom. A variable rate means that a borrower can pay off their loan as quickly as they want, without penalty. Also, these types of loans give you the freedom to refinance without incurring break fees.
Split loans – split loan gives borrowers the best of both traditional loan options – the variable and fixed rate. As such, this loan option enables lenders to split your loan over multiple accounts that attract varying rates of interest. Consequently, the split rate mortgage offers you some rate rise protection and loan features. This loan type is ideal for home buyers looking for security and flexibility, with you able to negate risk and take advantage of depreciating rates.
Home Loan Comparison – Fixed, Variable or Split Rate
So, what are the pros and cons of the three key home loan types – fixed, variable or split rate?
Fixed Rate
Pros
Makes budgeting easier – With fixed term over 1- 5 years, you know exactly what you're repayments will be, so you can plan ahead and set financial goals with confidence.
Protect yourself against rate rise - When interest rise, your interest rate doesn't change with market condition for the set period
Cons
Rate drops won't apply to you - you will not benefit from any rate drop for set period.
Limits on extra repayment - there are generally restrictions on how much you can pay off on a fixed loan during the fixed period.
Break cost - Fixed rate loans may have a break fee if you change or pay off your loan within the fixed rate period.
Variable Rate
Pros
Rates may fall– as variable rate fluctuate with the market, your variable rate will also move and when rates fall, you'll benefit in getting a lower rate.
Flexibility and features - Many variable rate loans come with flexible repayment options and don't charge you for making extra repayments. This lets you repay your mortgage faster and without penalty or in ways that suit you better. They are more likely to include features such as redraw and offset accounts.
Easier to switch - It is usually easier and cheaper to switch loans if you find a better deal elsewhere if you have a variable rate home loan as no break cost are involved.
Cons
Rates may rise - The biggest risk with a variable rate loan is that your rate can rise at any time. This can catch you by surprise and will result in higher repayments.
Makes budgeting harder - It can be difficult to budget with certainty as loan repayments can increase and decrease when interest rates change.
The Third Option: Split Loan
Having a split loan is really a combination of the two loans, one fixed and one variable. This allows you to have the best of both world where one part of your loan will remained fixed knowing what you pay month to month, while the variable part can allow you to take advantage of rate fluctuations if rates continue to drop.
The main drawback of a split loan is that you may still be ineligible to pay back your loan early. On the variable portion, you can make extra payments to reduce your loan rate. But the fixed side will still impose penalties for early repayments.
Fixed rate, variable rate, and split loans all have pros and cons, and what works best for your family will depend on your circumstances. Is the stability of a fixed rate your most important concern, or do you want the option to make additional payments to your mortgage as your income rises?
Is now the time to Fixed my Home Loan?
There’s no one correct answer to that, unfortunately. You'll need to look at your circumstance and what you want to achieve and decide if what you want out of your home loan. From there, you can decide if you want to keep your loan as fixed, variable or a mixture of both.
To help understand your needs better and discuss your mortgage needs, talk to Home Loan Depot today here, call us in 1300 967 120 or email info@homeloandepot.com.au. We can help you find the loan that fits your financial and family needs.
