Fixed and variable rate mortgages
Discerning the differences between fixed rate home loans and variable home loans may require a bit of digging and forward thinking, but it pays to do the leg work.
There are many factors involved in finding the right home loan to suit your needs, but top of almost everybody’s list will be price.
It’s almost universal to want to pay off your home as quickly and as cheaply as we can, so let’s explore the options of fixed rate and variable home loans.
Is a fixed loan right for me?
When shopping for home loans, you’ll often see fixed home loan rates advertised. A fixed rate loan gives you the ability to secure budgeting security for an agreed period of time, knowing that your home loan repayment won’t change. If this is something that appeals to you, a fixed rate loan is an option worth exploring.
What is a fixed rate mortgage?
A fixed rate home loan gives the borrower the ability to lock in, or fix their interest rate for an agreed period of time, usually between 1-5 years. During this time, the interest rate will not change as a result of market conditions, meaning the borrower can be assured that their repayment amount will not change.
Fixed rate loan benefits
Repayment and budgeting security
A borrower who takes up a fixed rate does so knowing that for the length of their fixed term, their loan won’t be subject to interest rate changes. The benefit of this is that during the fixed term, the borrower is able to enjoy a sense of security knowing that their required home loan repayments will be constant. This may ease the pressure on the borrowers’ budget and provide peace of mind, especially if market conditions begin to become volatile.
Often a lower interest rate
Often special offers are available for fixed rate loans. Many lenders, at times, advertise special fixed rates - this provides borrowers with a chance to fix their loan at a low rate and get ahead on their loan. By paying as much as possible off their loan during the fixed term at a lower rate, it presents an opportunity for borrowers to shorten the life of their loan. Just keep in mind, most fixed rate loans will have limits set as to how far in advance borrowers can become before incurring penalties.
Ability to set and forget
If you don’t want to constantly be watching the home loan interest rate market, making sure your deal is still the best, fixing lets you find a loan and a rate that suits you, lock it in, and then focus on other priorities. Just don’t forget that usually, fixed rate mortgages usually revert to a variable rate once the fixed term expires, so keep this in mind as your fixed term draws to a close.
Fixed rate loan considerations
Can be more expensive at times
Depending on market conditions, you may find that advertised fixed rates are higher than variable rates or interest only options available. In this instance, the sense of security fixing your loan may provide might be outweighed by the extra cost associated with enduring your fixed term at a higher interest rate.
Less flexible
There is obviously a perception that fixed rate loans are less flexible than variable, and that is somewhat true.
Depending on your lender, you may be faced with significant break fees if you want to refinance, sell your property or pay off your loan in full before the fixed term expires.
Greater Bank
The costs relate to the loss incurred with you breaking your fixed rate term.
Rate FOMO
By opting to lock in an interest rate for between 1-5 years, there is a very real chance that during this time, market conditions could change, leading to variable rates dropping below your fixed interest rate. If this were to happen, it would be understandable to want to switch back to a variable rate, but this may mean you’re faced with unwanted break costs.
Getting ahead
While it’s perfectly logical to try and use your fixed rate period to make extra repayments and get ahead on your loan, particularly if you’re on a low rate, make sure you know your loan product well. Depending on your lender, there may be a limit on how far in advance you’re allowed to get before you may be charged a pre-payment fee. Do your homework!
Is a variable loan right for me?
Often it’s flexibility that draws borrowers to a variable rate home loan.
Without a locked in interest rate or fixed term, there can be more freedom for the borrower to make extra repayments or borrow extra if they need it.
While being on a variable rate means your minimum repayment amount can change, this does mean you could end up paying less or more per month as market conditions change.
What is a variable rate mortgage?
A variable rate mortgage is a home loan with an interest rate that is subject to change. You agree to a loan term (usually between 25-30 years) and over the course of the loan, you may experience a rise and fall in the interest rate on your loan, as well as your minimum repayment amount. Variable rate means exactly that – rates may vary.
Variable rate loan benefits
Repayment flexibility
If you decide on a variable rate home loan, you could find you have access to a wider range of repayment options, including the ability to make extra repayments and get ahead on your mortgage without worrying about having about pre-payment fees or break costs. Some lenders only offer loan features like offset accounts or home loan redraw on variable products, meaning you may be able to use your extra repayments to further reduce the interest you pay.
Ease of refinancing
Say you find a better deal elsewhere while on a variable rate home loan – it’s much easier to make the switch to a different lender or home loan product knowing that you don’t have to think about break costs.
You may pay less if rates fall
Your lender may decide to cut interest rates for a variety of reasons, usually to do with funding costs. If you find yourself on a variable rate and your lender chooses to bring this interest rate down, you’ll see the effect of this in the form of a lower minimum repayment amount.
Offset
Many variable rate home loans come with offset accounts, giving you the ability to park savings while effectively reducing the balance of your home loan on which you are charged interest.
Variable rate loan considerations
Repayment uncertainty
Because lenders are able to change their variable rates at any time, this means that variable rate borrowers are likely to see their interest rate change multiple times over the life of the loan.
With any variable interest rate rise, you will also see an increase to your minimum required repayment amount.
With this in mind, borrowers who take up variable rate loans may wish to think about using the features of their loan to get ahead and build up a bit of a buffer to absorb the impact of any potential variable rate rises.
Cash flow uncertainty
Because your variable rate can be easily subject to change, this means that it becomes a bit tricky to predict your level of cash flow over time. For example, even if you have been taking advantage of mortgage offset accounts or building up a repayment buffer, an increase to your variable interest rate may see this absorbed quite quickly as you look to service your new higher repayment amount.
Split home loan
It’s also possible to split your home loan between a fixed and variable rate. This means you would take out a certain amount of money at a fixed rate, and another amount at a variable rate. The advantage of this is that you give yourself some security in your fixed-rate payments, but you can also benefit from the flexibility of a variable loan.
Greater Bank
Home loan tips and hints
Choosing the right home loan for you really depends on your own personal situation and needs. Whether you go for a fixed loan, a variable loan, or a loan split between the two, you really need to consider your own personal circumstances. Each of the three options comes with its own advantages and drawbacks, but some will match up with different people better.
If, for example, you have strict budgeting goals and you really want the security of a fixed rate, it may very well be the best option for you. A fixed-rate might also just suit you better if you like to keep things simple and secure.
On the other side, a variable home loan allows you to benefit from market fluctuations. So, for example, you can benefit from interest rate decreases. But you have to be willing to ride the market if that’s the case. You’ll need to make sure your income, or your projected income, will be able to cover increases in the rate.
If you’re not absolutely sure about either option, you can split your home loan between the two, hedging your bets a little. You’ll get the security of knowing part of your loan is locked in at a certain amount, while you can still benefit from a potentially low variable rate.
Applying for a home loan
If you have an idea of whether fixed or variable interest rate would be right for you, or you simply want to explore your options further with a lending expert, you’re able to start a conversation with us at anytime.
Request a call-back by submitting a home loan enquiry, call us on 13 13 86, visit any of our branches or find a lender that can come to you.
Our lenders have been helping locals find the right loan since 1945, and are always happy to help. Check out our range of home loans and our current interest rates.