One of the most common questions mortgage brokers get asked by clients, especially at the moment with interest rate rises on the cards, is whether to fix their home loan or keep it variable. The key to making the best decision that’s right for you is understanding the difference between both as well as knowing your own personal and financial circumstances. Let’s look at the key differences between both loan types.
Fixed rate home loan
- With a fixed rate home loan, the interest rate is fixed for a certain period of time, generally from 1 to 5 years.
- Repayments won’t change during the period you choose.
- Once your fixed rate term has expired, the loan will automatically revert to a standard variable rate home loan and the rate will be whatever it is at the time. It is usually much higher than the fixed rate.
- Fixed rate loans are excellent for budgeting because your repayments are set in stone for the term you choose and are therefore predictable and easy to factor into the household budget.
- If interest rates rise, your fixed rate mortgage won’t be affected so you have that peace of mind.
- A downside, however, is that you are restricted in terms of how much extra you can pay down off your mortgage.
- Another potential drawback is that there are financial penalties for paying the loan out early, including if you sell or refinance.
Variable rate home loan
- With a variable rate home loan, your rate can fluctuate during the term of your loan. This is dependent on general market and economic conditions.
- Rate changes may be dictated by the Reserve Bank or if your lender’s cost of funding increases or decreases.
- There is less predictability because your repayments may go up or down making budgeting more challenging.
- On the upside, variable rate home loans generally offer more flexibility and features than fixed rate home loans, such redraw and offset facilities as well as the ability to make lump sum repayments to reduce the interest paid and pay off your mortgage more quickly.
You could also ask your mortgage broker about the option of having a split loan, which means you can fix a portion of it and keep the rest variable.
As is the case with all major financial decisions, there is no one-size-fits-all answer as everyone’s circumstances are different. The key right now is to look at your current arrangements and do some research and calculations to ensure you are in the best position when interest rates do start to rise.