Taking out a home loan is a big decision, and there are a couple of loan options for you to consider. As with personal loans and business loans, there are both fixed interest and variable home loans. To ensure you choose the right one for your financial situation, you’ll have to balance up the pros and cons of each.
In addition, take the time to have a good look at your bank accounts, figure out what you’ll need to pay in stamp duty and other taxes, and make good use of an online mortgage calculator. These factors will all feed into your decision.
At WeMoney we know it’s a lot to think about. So, whether you’re in the property investing game or you’re looking for the perfect home in which to share life moments with your family, we’ve pulled together all you need to know about fixed versus variable home loans.
Let’s get to the following commonly asked questions:
Trying to choose between a fixed and variable interest rate home loan is all about deciding how you want your loan repayment to play out. But, before you can even begin the process of applying for a loan, you should take a moment to check your credit score. Ultimately, it will be far harder for home buyers to get a good loan with a poor credit score.
Note: You can get a credit check through AFSL and Australian Credit, or with any bank you have credit cards with. Just make sure that, whichever organisation you check your Australian credit score with has an Australian credit licence.
Once you know you have a good enough credit score, you can take a closer look at different loan features to see what perks you can get with the fixed and variable home loans available to you. Generally speaking, there are certain things you can expect from each type of loan, which should make the decision between fixed versus variable rates easier to arrive at.
With a fixed loan, your home loan interest rate will stay the same for a fixed term. The length of this rate period is usually decided by the borrower. That said, it’s a much easier process to look at comparison rates and work out payments on a home loan calculator. By doing this, you’ll be able to get a rough idea on the costs that you’ll need to pay.
Important: In the short-term, if you do need to stick to a budget, then a fixed rate makes this more achievable than a variable rate home loan. However, if you do go the fixed rate route, then it's always wise to lock in a fixed rate when the rates are low. That’s because, if rates do rise, then you can benefit from this by locking in a better deal. However, on the flip side if rates drop lower, then there’s an opportunity cost associated with this, meaning that you could be missing out on a lower rate. This is why it's vital to weigh up the pros and cons, analyse what’s happening on a macro landscape, and seek financial advice from a licensed financial planner.
Unlike a variable interest rate home loan, home owners have certainty when they opt for a fixed rate loan. Most of the time, they will set the loan term and its time period themselves, within certain parameters set by the bank. During this time, interest rates are guaranteed to stay the same.
Some of the advantages include, being able to:
Note: When most fixed term loans end, they will be rolled over into a standard variable interest rate.
While a fixed rate loan can give homeowners peace of mind, there are cons of fixing your interest rate for an extended period of time. For one thing, while you are protected if the interest rate rises, if interest rates reduce then you could end up losing out.
And, even though the repayment amount is fixed, you could end up incurring additional charges if things change. Basically, should you decide to pay off your loan before its agreed end, you would then have to pay an additional break fee.
Unfortunately, break fees costs associated with a fixed home loan can be substantial. Depending on your contract, you may also be limited by the amount of repayments that you’re able to make every year, which is why fixed interest rates can be considered to be an inflexible option.
The interest you pay on a variable interest home loan will be determined by a range of factors, including the official cash rate set by the Reserve Bank of Australia. This means that you won’t know what interest you’ll be charged from month to month.
However, by opting for a loan that offers variable interest rates, you can enjoy more flexibility and additional features not available to those with fixed rate home loans. When it comes down to comparing fixed vs variable home loans, take into account the following benefits and drawbacks of a variable loan.
One of the big differences between fixed and variable loans is that you can make additional repayments with variable rate loans. This would allow you to pay off your loan sooner, if you chose to do so. And, in many cases, banks will give you access to redraw facilities, so you’ll still have access to those additional payments should you need them later on.
Note: Another perk is that you may be able to enjoy offset benefits with a variable loan, if you open up an offset account.
This would offset home loan repayments by minimising the amount of interest you pay. Not to mention the fact that, if interest rates fall, the repayments you do have to make would be lower than they would with a fixed rate loan.
While variable loan rates can be beneficial, they too have some less positive attachments. For instance, those with a standard variable loan (or, in other words, ones without offset benefits), there is the constant uncertainty surrounding interest rates and repayment costs.
So, if you’re hoping to budget effectively far into the future, the decision between fixed or variable might have to swing towards the former. Plus, the benefits of a variable loan do suit some better than others. You might decide that extra repayments and potential interest rate drops aren’t worth it when you weigh up fixed and variable rate loans.
Trying to decide between a fixed or variable home loan isn’t always easy. There are plenty of factors to keep in mind while you’re comparing home loans and looking at loan calculators, and it might not immediately be clear which option is the right one.
Not to worry, though, because if you’re really stuck, there is also the option to split your home loan. A split loan just means that a portion of your loan interest rate would be fixed and another portion would be variable, so you’d get the best of both worlds.
To find out more about which option might work best, consider going to a mortgage broker for financial advice. It might also be possible to book an in-branch consultation with an expert at your bank through your online banking portal.
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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.