Is it Better to Get a Fixed or Variable Loan? The Pros and Cons

Fixed vs. Variable Rate Home Loans are an important decision for everyday Australians.

When it comes to home loans, the decision is more complex than just fixed vs variable rate home loans. It’s important to consider what type of loan you want. No home loan is exactly the same, and it’s important to choose a loan that will suit your living circumstances not just for the immediate future, but extending into the following years.

Loans can typically be broken up into two forms when charged interest: a fixed-rate or a variable-rate interest loan. Both have benefits, and it comes down to what you need in your loan, as well as the current state of the market.

Fixed vs. Variable-Rate Home Loans Australia

 

What is a fixed-rate home loan?

When you apply for a fixed-rate loan, you agree to pay a stable, unchanging amount of interest on repayments for an agreed-upon period. 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 are typically between 1-5 years. When the loan term ends, you will automatically revert to a variable interest rate (more on that below). If your fixed-rate term is coming to an end, it’s a good idea to schedule a meeting with your MoneyQuest mortgage broker.

The benefits of a fixed-rate home loan

  • You pay a consistent fixed monthly repayment, meaning you know the exact amount for the decided-upon period.
  • You’ll be able to budget and plan knowing how much your mortgage repayments will cost.
  • If interest rates rise, your minimum repayment amount will not increase.

The risks of a fixed-rate home loan

  • You pay the same in interest, even if rates begin to fall.
  • Choosing to break the fixed-rate period, or make additional repayments, may result in a “break cost fee”.
  • Fixed-rate home loans are generally more restrictive and may lack the flexibility of a variable-rate home loan.

What is a variable-rate home loan?

A variable-rate home loan sees the interest rate change depending on market conditions. Your monthly mortgage repayments may fluctuate per month depending on whether interest rates climb or drop. The deciding factor is generally the Reserve Bank of Australia’s cash rate decision, which influences the interest rates imposed on your home loan by lenders.

The benefits of a variable-rate home loan

  • Variable-rate home loans typically offer more flexibility and features.
  • You may be able to make additional repayments on top of your minimum repayments, reducing the length of your loan.
  • You could use an offset account to reduce your interest.
  • You may be able to redraw any additional repayments you’ve made when you need extra money.
  • You may pay less interest if rates begin to fall.

The risks of a variable-rate home loan

  • If interest rates rise, the amount of interest you are charged may increase.
  • Variable-rate home loans provide less financial certainty than fixed-rate home loans, and can become expensive during high interest periods.
  • It can be difficult to budget and financially plan, as monthly mortgage repayments may vary.

Which is better – a fixed-rate home loan or a variable-rate home loan?

The answer to this question depends on your circumstances, and what you require from your home loan.’

A fixed-rate home loan provides more security and structure. Comparatively, a variable-rate home loan may be more suitable if you value flexibility and access to more home loan features, such as an offset account or redraw facility.

Can I have the best of both worlds?

Some lenders allow you to use a “Split Home Loan”. This involves splitting one portion of your loan as a fixed-rate, and the other portion as a variable-rate. You’re then required to make separate repayments on each.

This strategy allows you to tailor the flexibility and security of your loan.

It’s important to be cautious, and if you choose a split loan solution to be vigilant about meeting both loan repayments. Additionally, while you’ll benefit from the pros of both types of loans, you’re also prone to the risks, including varying repayments and potentially having some of your loan locked into higher repayments.

To find out what loan option is right for you, reach out to your local MoneyQuest mortgage broker. We can explore the benefits of each loan type and help you choose the loan type suitable for your needs.

 

Read more on the Australian Government’s MoneySmart page.

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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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