Fixed vs Variable Rate Home Loans 2022 | Pros and Cons
When it comes to choosing a home loan, there is a lot to consider. One of the first things you need to think about is whether you want a fixed rate home loan, a variable rate home loan, or a split loan that consists of both types. Read on to learn about the pros and cons of fixed and variable interest rate home loans.
Fixed vs. Variable Home Loans Australia
What is a fixed rate home loan?
A fixed interest rate is one that doesn’t change. It is fixed. Stable. Solid. So if you have a fixed rate home loan, the interest rate associated with your loan remains the same for the duration of the fixed rate period. Fixed rate periods vary in length depending on the loan product, but they typically last between 1 and 5 years. So if you have a 2 year fixed rate home loan for example, you will be charged the same interest rate for 2 years. Once the fixed rate period ends, loans usually revert to the lender’s standard variable rate, unless you decide to refix your loan or make other arrangements.
What are the pros and cons of a fixed rate home loan?
| PROS | CONS |
|---|---|
| Peace of mind – you’ll know exactly how much your repayments will be for the duration of the fixed rate period. | If interest rates fall, you won’t be able to take advantage of a lower rate. |
| You’ll be able to budget and plan for the future knowing how much your mortgage repayments will cost. | If you break the fixed term before it expires, or make additional repayments, there may be fees involved. |
| If interest rates rise, your minimum repayment amount will not increase. | Fixed rate home loans are generally more restrictive and have limited features. |
| With competition amongst lenders increasing, some lenders are now allowing offset accounts to be added to their fixed rate loans. This option was not available in the past, or lenders limited the amount of money that could be offset. Lenders often don’t promote these additional benefits, which is why talking to a broker can be extremely valuable. |
What is a variable rate home loan?
A variable interest rate is one that can change over time. So if you choose a variable rate home loan, the interest you are charged can increase and / or decrease throughout the term of the loan. The interest rate’s movements depend on a variety of factors, including market conditions, funding costs of the lender, and the official cash rate as set by the Reserve Bank of Australia Board.
What are the pros and cons of a variable rate home loan?
| PROS | CONS |
|---|---|
| Variable rate home loans typically offer more flexibility and features. | If interest rates rise, the amount of interest you are charged may increase. |
| You may be able to make additional repayments on top of your minimum repayments and reduce the length of your loan | Variable rate home loans provide less financial certainty than fixed rate home loans. |
| You may be able to keep funds in an offset account to reduce the amount of interest you are charged. | Budgeting can be difficult due to not knowing exactly how much your repayments are going to be. |
| You may be able to redraw any additional repayments you’ve made when you need extra money. | |
| If interest rates fall, the amount of interest you are charged may decrease. |
Which is better – a fixed rate home loan or a variable rate home loan?
The answer to this question is of course different for everyone and depends on individual circumstances. If you want certainty around your mortgage repayment schedule, a fixed rate home loan might be the way to go. If you value flexibility over certainty, a variable rate home loan might be better suited to your needs.
Can I have the best of both worlds?
Some lenders offer the option of splitting your home loan into multiple parts. With a split loan, you can nominate for part of your loan to be charged a fixed interest rate, whilst leaving the remaining part of your loan to be charged a variable interest rate.
For example, if you have a $700,000 loan, you might decide that you want $400,000 of it to be charged a fixed interest rate, with the remaining $300,000 to be charged a variable interest rate. This enables you to reap the benefits (and experience the drawbacks) of both loan types. How you split your loan is up to you.
As always, we recommend chatting with a finance specialist before making any decisions. Our experienced team of MoneyQuest mortgage brokers can assess your financial position, help you to define your goals and then assist you with making a choice that best suits your needs
Disclaimer:
This article is written to provide a summary and general overview of the subject matter covered for your information only. Every effort has been made to ensure the information in the article is current, accurate and reliable. This article has been prepared without taking into account your objectives, personal circumstances, financial situation or needs. You should consider whether it is appropriate for your circumstances. You should seek your own independent legal, financial and taxation advice before acting or relying on any of the content contained in the articles and review any relevant Product Disclosure Statement (PDS), Terms and Conditions (T&C) or Financial Services Guide (FSG).
Please consult your financial advisor, solicitor or accountant before acting on information contained in this publication.
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