Fixed or Variable Loans - Which One to Choose?

Do you apply for a variable rate or a fixed rate loan - perhaps both...

A fixed rate mortgage retains the same interest rate throughout the course of the term. Home owners benefit because they're given a fixed monthly payment that they can effectively budget for and it won't change with the market. However, because the interest rate risk is placed on the lender, fixed rate mortgages tend to have a slightly higher interest rate.

A variable rate or floating mortgage changes its interest rate depending on the economic index and interest rates set by the Reserve Bank of Australia. While borrowers will typically get a lower opening interest rate, they're subject to the changes of the market. Overall, variable rate mortgages tend to be cheaper than fixed rate loans.

 

Why Choose a Variable Rate

This largely depends on your overall financial position. If your income is strong and you can easily afford to make additional repayments over your regular repayments then a variable rate loan may be best option. This can help reduce the term of your mortgage and increase the amount of equity in your home providing your home value remains constant or increases. 

Another reason to consider a variable rate if interest rates in the medium to long term are going to remain constant or are likely to fall then a variable rate may be the best option.

 

Why Choose a Fixed Rate Loan

Fixed rate loans a better for the more conservative type borrower who would like to know what their exact repayments are going to be from month to month. This allows them to budget each month for their home loan repayments.

Fixed rate loans are also advantageous if interest rates are likely to rise in the medium to long term. By locking in a fixed rate you are likely to save a significant amount on interest repayments while interest rates are rising.

The main disadvantages with fixed rate loans is that they are not as flexible as variable rate loans. Most fixed rate loans restrict the borrower in the following ways; 

•  limiting the repayments you can make (some lenders do offer unlimited repayments)

•  do not allow to redraw funds; however, some lenders will allow this

•  most fixed rates do not come with an offset; however, some lenders attached offset accounts

•  there may be break fees if you exit the fixed rate term early

Split Loans

If you are unsure whether to go variable or fixed rate loan then consider a split loan.

Split loans are a combination of variable and fixed rate loans. You can have a percentage of the loan as variable while the other percentage fixed. You can have half fixed and half variable, 70% variable and 30% fixed or any combination you prefer.

These loans are for borrowers who want to hedge their bets. They give the borrower the flexibility of a variable loan and the security of a fixed loan. Generally, taken out when the direction of interest rates are rising or when they have no clear direction. 

 

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Need Help?

To find out whether variable, fixed or a combination between the two is best for your lending needs we recommend that you contact one of our mortgage professionals below.

They can show you all the all the hidden costs and restrictions as well as show you the most reputable lenders to choose from.

 

Mortgage Quote