One of the biggest decisions you will most likely come across in your journey is your choice of home loan interest rate type. Choosing between fixed or variable home loans is not easy, but nevertheless it’s important to gain a sound understanding of how each type of mortgage could affect you – particularly when you consider this would be the biggest purchase you will ever make.
A variable rate home loan is a type of loan where the interest rate is a floating rate which means the interest rate may go up or down over the life of the loan. When this happens, your monthly repayments will also change.
The cost of a variable interest rate loan will change constantly throughout the life of the loan, this is a result of external factors, with the most obvious factor being the reserve bank’s official cash rate and the economy as a whole.
A fixed interest home loan is a set rate that will not to change for the length of time you have agreed to fix it for – anywhere from 1 to 5 years with 2 years being the most popular. Then at the end of your fixed term, you can choose if you want to refix your rate at the new term or let it roll over to a variable rate.
Both loan types have their pros and cons, and what is right for one borrower may not necessarily be the best option for another.
Variable rate loans pros and cons
| Pros | Cons |
|---|---|
| The rate is flexible and moves with the market | Financial uncertainty with the rates moving with the market |
| You can make extra repayments, which helps you pay your loan off sooner | Harder to stick to a budget with the repayments constantly changing |
| You can have an offset account linked to your variable rate |
Fixed interest rate home loan pros and cons
| Pros | Cons |
|---|---|
| Your repayment amount is locked in at a rate so there is a stability of repayments | Offer little in the way of freedom, with specific limits of additional repayments |
| Easier to budget when you have predictable repayments | Rates are fixed which could be a blessing and curse depending on the direction of the rates movements |
| You can make a limited amount of additional repayments without penalty | You may have to pay break costs if you sell your home or change the loan within the fixed period |
If your still not sure if you want fixed or variable, your other option is to split!
Depending on your personal circumstances, it can be difficult to choose between either option. An alternative that lenders are offering to customers is called a split loan.
This is essentially allowing you to split your total borrowing amount into two loans, one fixed and one variable. So if you had a $500,000 loan you could split that into a variable $250,000 loan and a fixed $250,000 loan.
This approach gives you the ability to make as many additional repayments as you want into the variable loan while keeping that security of a fixed repayment amount on the other loan.
When choosing between a fixed rate, variable or split rate loan, it’s important to keep in mind your goals and individual financial situation. Speak to one of our lending specialists to see how we can help you explore what options are available for you.
Author: Amanda Liszewski, Lending Specialist, Better Homes and Gardens Home Loans
**The information provided constitutes information which is general in nature and has not taken into account any of your personal objectives, financial situation, or needs, please feel free to give our lending specialists a call to see how we can help you.
Disclaimer: The opinions posted within this blog are those of the writer and do not necessarily reflect the views of Better Homes and Gardens® Real Estate, others employed by Better Homes and Gardens® Real Estate or the organisations with which the network is affiliated. The author takes full responsibility for his opinions and does not hold Better Homes and Gardens® Real Estate or any third party responsible for anything in the posted content. The author freely admits that his views may not be the same as those of his colleagues, or third parties associated with the Better Homes and Gardens® Real Estate network.