When buying a home, one of the main decisions you’ll face is whether to go with a fixed or variable loan.
Each has its pros and cons, depending on your situation and the economic climate. Here are some tips to hopefully make the choice a little clearer for you.
What's the difference between the two?
A fixed home loan is one in which you can lock in (or fix) the interest rate level for a period of time, usually from between one and five years. In that period, the interest rate, and therefore your minimum repayment, will remain unchanged.
A variable home loan is one that moves up or down depending on the market. In simple terms, when the economy is booming, the variable rate will be higher. When the economy is struggling, as it is now, the variable rate will be lower.
What are the pros of each?
Fixed rate loans offer peace of mind. You’ll know that no matter how high the variable rate goes, you won’t pay any more. They let you plan ahead and are therefore great if, for example, you’re thinking of starting a family and might be going from two incomes to one.
A variable rate will drop if the market falls. Therefore you might be paying less for your loan next month than this month. In addition, a variable loan offers far more flexibility, with the ability to make additional payments/withdrawals and an offset account which will also lower your overall repayments.
What are the cons of each?
Although a fixed rate loan is great when the variable rate rises, if the market drops you’ll be paying more than everyone with a variable loan. Fixed rate loans are also less flexible than variable loans. You usually can’t make extra payments on your loan, redraw additional funds when you need them, or have an offset account.
Variable rate loans rise when the market improves. It is therefore harder to plan ahead, as you won’t know how much you’ll be paying for your loan next month or next year.
What's the best loan right now?
This will depend on your own personal circumstances as much as the current climate.
The good news is that currently, interest rates are at an all time low, so either way your repayments in the short term will also be low.
If you have a large amount of money available to put in an offset account, or will be able to make additional repayments on your loan, a variable loan will almost certainly be better for you.
If you’d like the assurance of a low interest rate, and your circumstances may mean a reduction in income in the next few years, then it might be a good idea to go for a fixed loan. But before fixing your loan, make sure to have a talk with your lender.
Can you have both?
Yes, you can have some of your loan fixed and the remainder in a variable loan. This enables you to have the flexibility of a variable loan together with the security of a fixed loan.
We hope this has answered some of your questions about the right home loan for you.