Whether you choose a fixed or a variable home loan can depend on your personal preferences. Here, we explore some of the differences between fixed and variable home loans, to help you decide what’s best for you.
There are many home loan options available. These may include the payment type (eg. ‘principal and interest’ vs ‘interest only’ payments) and the type of interest rate. In this article, we focus on the types of interest rate and how they can affect a home loan.
Generally, when you take out a home loan, you have two choices: a fixed interest rate or a variable interest rate.
A fixed interest rate home loan is one where your interest rate is locked in (i.e. fixed) for a certain period, typically between one and ten years. During the time your interest rate is fixed, both your interest rate and your required repayments won’t change.
A variable interest rate home loan, on the other hand, can change at any time. Lenders may increase or decrease the interest rate attached to the loan. The interest rate may change in response to decisions made by the Reserve Bank of Australia, as well as other factors. Your required minimum repayment amount will increase if interest rates go up, and decrease if interest rates fall.
Which one is better for you? It really depends on what you’re looking for in a home loan. Here are some of the pros and cons of each.
If you want some flexibility about how you repay your home loan, you can apply for a Split Home Loan.
By getting a split home loan, you are dividing your home loan into two. One part of your loan is on a fixed interest rate for a period of time while the rest of the loan is on the variable interest rate.
Let’s look at an example of how it works:
You have a loan that is split with 50% fixed and 50% variable interest. If variable rates were to go down, you get the benefit as interest on 50% of your loan would be charged at that lower rate.
However, if variable rates were to increase, then that increased interest rate would be charged on the variable portion of your loan but not on the fixed portion until after the fixed term expires.
In addition, you could make extra repayments on the variable portion to help repay your loan sooner.
When the fixed rate period ends, that fixed portion of the loan will be charged interest at a variable rate, although you may apply to re-fix that portion of the loan for a further period of time if you wish.
Before deciding whether to split your loan, you need to consider carefully whether this is right for you given your personal circumstances. It’s also a good idea to check what fees apply with split loans.
For more information, contact us at ANZ.
Fixed rate home loans
A fixed rate home loan can give you peace of mind that the required repayment amount will be the same during the period of the fixed term, which can be very handy when you are trying to stick to a budget.
You can generally choose the time period you would like to fix your interest rate for. Depending on the lender, this could be for up to 10 years. Generally, at the end of the fixed term your loan will roll over to a variable rate, unless you choose to repeat the process.
While a fixed interest rate can be useful to help protect you against potential interest rate rises, it can mean that you’re stuck with the fixed rate if variable interest rates decrease during the fixed period.
Fixed rate home loans generally have fewer features than variable rate home loans. For example, with a fixed rate loan you may not be able to access redraw during the period the loan is fixed.
It's also important to note that if you decide to pay off or refinance your home loan before the end of the fixed term, you may have to pay break costs. These may be significant sums of money.
Locking in the fixed rate
You might find a great fixed rate deal when you’re applying for a home loan. But that doesn’t guarantee that you’ll get that fixed interest rate when you settle on the property.
The fixed interest rate that will apply to your loan is the fixed rate offered by the lender on the day of settlement, not at the time of loan application.
You may be able to secure the fixed interest rate before settlement by paying a Lock Rate Fee.
Please discuss with your lender whether locking in the fixed rate on application is best for you.
Once your fixed rate term starts, the rate will not vary until the term expires.
Variable rate home loans
A variable rate home loan typically offers more flexibility than a fixed rate home loan. It generally comes with a range of features which may help you react to changes in your life or financial circumstances.
For example, many variable rate home loans let you make additional repayments to pay off your loan faster, and then let you redraw these additional funds if you need them in the future. Many variable rate home loans also have an offset account feature, which could help to reduce the amount of interest you pay.
A potential drawback of a variable rate home loan is that interest rates can change at any time. This means they can go up and down. It's a good idea to consider whether you can afford higher loan repayments if interest rates were to go up.
Can’t decide? Perhaps consider splitting the loan
If you can’t decide whether to go with a fixed or variable home loan, then you could consider splitting your loan between the two options.
If you split your home loan, it means that you assign a certain portion to a variable home loan, and the rest to a fixed home loan. You may choose to go 50:50, 60:40 or some other ratio. It’s up to you.
Ask your lender about your options.