Fixed versus variable
Understanding your interest rate options
Buying a home can be a very big decision. Deciding on how to structure your home loan can be tricky as well! There are a number of lenders and a number of home loan ‘products’ to choose from. It is easy to feel overwhelmed when taking steps towards your dream of home ownership.
To help you make sense of it all, here’s a quick explanation of the difference between fixed rate and variable home loans:
Fixed Home Loans
A fixed rate home loan is locked in at a set interest rate for a period of one, two, three, four or five years. When you select this type of loan, your monthly (or fortnightly) mortgage repayments won’t change, regardless of whether interest rates go up or down.
People who choose to fix their home loan usually do so because they believe interest rates may soon rise. They figure their strategy will save them money in the long term. Interest rate changes are never 100% predictable, however the benefit of a fixed rate loan is that you can budget knowing that your repayments will stay the same regardless of what happens with the market.
Fixed rate loans also come with some other restrictions. For example, you may not be able to pay additional or lump sum amounts off your loans, or may be restricted to a capped extra repayment amount.
Variable Home Loans
Whenever the Reserve Bank of Australia makes an announcement about interest rate changes lenders generally make adjustments to their variable rate loans. In recent times, some lenders have even chosen to change their rates independently of what the Reserve Bank is doing. Choosing a variable home loans means your repayments will change depending on market or your particular lender.
A drop in interest rates means a lower monthly repayment if you have a variable loan. When this happens, you may be able to keep paying the higher amount in order to pay your loan off more quickly. The drawback of a variable loan is that if interest rates go up, so do your repayments. You will find yourself more out of pocket each month. If you choose a variable interest rate it is important to leave a ‘buffer’ so that you can afford extra repayments if need be.
Generally people who decide on a variable home loan do so in anticipation of interest rates going down or because they prefer a stronger degree of flexibility, however as previously mentioned, there is never a guarantee.
Splitting Your Home Loan
Many home buyers get the best of both worlds by splitting their home loan between a fixed and a variable loan. You can choose to pay 50/50, 60/40 or even 80/20. That way, a portion of your repayments stay the same for a set period and you will not end up incurring extra expenses for the entirety of your loan should interest rates go up.
Talking to your local property lending specialist will help you to decide whether a fixed, variable or split loan is best for you.