Choosing between a fixed vs variable home loan depends on your financial plans. Do you want stability with a fixed-rate mortgage, or do you prefer the flexibility of a standard variable rate?
This guide covers everything you need to know, from the advantages to things to consider about both loans. Whether you’re a homeowner or an investor, understanding these options helps you confidently decide.
Find out which type of mortgage suits you best. Read more to learn everything you need about fixed and variable home loans.
What are Variable Interest Rate Loans?
A variable interest rate loan has a rate that can fluctuate over time. According to the Reserve Bank of Australia, variable rates fluctuate based on market conditions. This means your monthly payments may increase or decrease.
Lenders set these rates using a standard variable rate or other benchmarks. While this loan offers flexibility and potential savings when rates drop, it also carries pricing uncertainty. So, it has less predictability compared to fixed rate loans.
Advantages of a Variable Rate Home Loan
A variable rate home loan mainly offers flexibility and features that suit many borrowers. Here are the key advantages:
- Lower initial rates: Often starts with lower rates than fixed loans.
- Flexibility: Allows extra repayments without penalties.
- Offset accounts: Helps reduce interest by linking savings accounts.
- Rate drops: Benefits from decreases in interest rates.
- No fixed term: Freedom to refinance or switch loans easily.
Things to Consider about a Variable Rate Home Loan
Here are some key points to consider before you choose this type of loan:
- Rates can rise: Your monthly payments may increase.
- Less predictability: Harder to budget compared to a fixed rate mortgage.
- Market dependence: Interest rates fluctuate based on economic conditions.
- Lender changes: Banks can adjust their standard variable rate at any time.
- Long-term cost uncertainty: You might pay more over the life of the loan if rates go up.
What are Fixed Interest Rate Loans?
In contrast, a fixed interest rate loan locks in a set rate for a specific fixed term, usually 1 to 5 years. This means your monthly payments stay the same during this time.
With a fixed rate mortgage, you’re protected if rates rise, but you won’t benefit if they drop. Lenders may also limit extra repayment options.
This loan suits borrowers who prefer predictability and want to budget without worrying about fluctuating interest rates.
Advantages of a Fixed Rate Home Loan
The major advantage of a fixed rate home loan is certainty. As your monthly payments stay the same for the fixed term, you’ll find it easier to budget. On top of that, it also brings other advantages:
- Predictability: No surprises if rates rise.
- Stability: Ideal for long-term financial planning.
- Peace of mind: Know exactly what you’ll pay each month.
Things to Consider about a Fixed-rate Home Loan
Before you make a decision, here are some things to consider regarding this loan type:
- No savings if rates drop: Your rate stays the same.
- Limited extra repayments: Restrictions on paying off the loan faster.
- Break fees: High costs for refinancing or exiting early.
- Less flexibility: Fewer features like offset accounts.
- Higher starting rates: Often pricier than variable rate loans
Frequently Asked Questions about Fixed vs Variable Home Loan
Is it better to have a fixed or variable loan?
It depends on your needs. Choose fixed for certainty and stable monthly payments or variable for flexibility and potential savings.
Is a variable or fixed rate lower?
A variable rate is usually lower at first, but it can fluctuate. A fixed rate mortgage starts higher but stays the same.
Can I make a switch from a variable rate to a fixed rate?
Yes, most lenders allow it but check for fees and timing. Locking in a fixed term works best when rates rise.
Conclusion
Choosing between a fixed vs variable home loan depends on your financial goals. A fixed rate mortgage offers certainty and stable monthly payments, while a variable rate loan provides flexibility and potential savings when rates drop.
Consider factors like repayment options, offset accounts, and your comfort level with fluctuating rates. Understanding these differences helps you decide the best option.
Still unsure about fixed vs variable home loans? Let our experts at Professional Home Loans guide you. Contact us today to find the best home loan option for your needs.