Is a fixed or variable home loan best for me?
If you've just whacked the 'SOLD' sign on your own slice of paradise – congratulations! But what comes next?
Between choosing your new decor vibe and finding your new local cafe, it's time to start thinking about the kind of home loan you want, fixed or variable?
The best place to start is by considering your short- and medium-term financial needs, and doing a bit of old-fashioned research.
So let’s find out more and compare whether a fixed, variable or split home loan is the best choice for you.
What is a fixed rate home loan?
With a fixed rate home loan, you agree to a set interest rate over the term of your home loan. That means the repayment amount you start with will be the same at the end of the fixed rate period.
Should I fix my home loan?
Locking in a fixed rate home loan can provide certainty (for the fixed term at least), which is great for tapping out of rate anxiety for a while if the market is up and down.
Advantages
Because your rate doesn’t change with the market, your monthly repayments will stay the same. That makes budgeting a lot easier – especially when planning things like weddings or a big holiday. But it means you need to be OK with potentially paying more than others if the rates go down during our fixed term.
Using a tool like our mortgage repayment calculator can help you get a better picture of your future finances.
Things to consider
A great fixed rate can be appealing, but make sure you check out the variable rate you’ll pay once the fixed term expires. This ‘revert’ rate may be a lot higher than the fixed rate, so you’ll need to make sure you have enough money to cover the potentially higher repayments once the fixed rate period ends.
Also, while you can make extra repayments, it is often capped at around an additional $10,000 per year. Anything more may attract a penalty fee.
What is a variable rate home loan?
As the name suggests, variable rates move with the market. Throughout the term of your loan, your interest rate could rise or fall.
Advantages
The obvious advantage of variable rates is that if they do go any lower, then so will your repayments.
You’ll also likely have the flexibility to make extra repayments. And you can use a redraw facility to withdraw additional repayments when you need them, so it’s a lot more flexible with your lifestyle too.
You can also reduce the interest you pay with an offset account, a transaction account linked to your home loan.
Things to consider
The fluctuating rates in recent years have left some homeowners anxious, but it doesn’t necessarily guarantee that fixed rates are the better option. At the end of the day, it comes down to how you tolerate risk. If rates rise through the roof, your roof (and everything under it) could get a lot more expensive.
Fixed vs variable home loans
The difference between fixed and variable home loans is that one is more certain than the other. If you enjoy going with the flow, the ‘floating’ rate of a variable loan may look appealing. Beyond the risk and the rate, deciding which is right for you will come down to you and your lifestyle. What’s your cash flow situation – can you put away extra funds, or will you need to dip in for future expenses?
Do you have job security? And can you afford higher repayments if need be? You can compare our fixed rate and variable rate home loans to see what works for you.
Like the idea of locking in a great rate but unsure about the commitment factor? Enter split loans.
What is a split loan?
A split home loan enables you to divide your home loan between a fixed and a variable rate.
It’s like taking an each way bet – giving you the flexibility of a variable rate with the certainty of a fixed rate. You also get access to all the variable rate features like offset or redraw facility, and the ability to repay more on the variable portion of your loan each year with no limit.
Things to consider
Getting the best of both worlds also means dealing with the disadvantages of both types of loans. The variable portion of your loan can still be affected by rate rises. This could increase your repayment amount.
On the other side, if rates go down, you won’t pay any less on your fixed component. You may also have to pay a break fee if you decide to refinance or pay off your home loan early.
How do I know what’s the best home loan for me?
There may only be a few options, but there’s a lot to factor in when choosing between them. And likely the biggest decision will be your appetite for risk with a variable rate, vs certainty with a fixed rate.
Still can't decide?
We have a range of rewarding home loan options to suit your needs. You can compare our home loan options at any time to work out the best option for you.
