One of the most critical steps in buying a new property is to finance your purchase correctly, ensuring it’s affordable and will not disrupt your lifestyle. Understanding your mortgage options will quickly bring you to a common dilemma: should I select a fixed or variable rate?

 

There is no right or wrong answer. The answer depends on your lifestyle and your risk threshold. There are pros and cons to each, and you may also be able to split your loan between the two. 

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Variable Rates (Moves up and Down)

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The cost of borrowing rises and falls depending on economic factors, such as inflation and the subsequent decisions taken by the Reserve Bank of Australia (RBA).

 

Usually but not always, lenders pass on the savings of an interest rate cut. However, banks have also independently increased their mortgage rates, citing the cost of doing business.

 

Variable interest rates do not have a fixed term. However, introductory rates – also known as honeymoon rates – can offer discounted arrangements over a set time.

 

One of the key advantages of variable-rate loans is their flexibility in repayments, enabling you to pay down your mortgage faster than the schedule.

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Fixed Rates ( Stays the Same)

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A fixed-rate loan maintains the same interest rate regardless of external factors, allowing you to budget consistently for your mortgage. Typically, consumers choose fixed-rate loans for up to three years, although extended options are available. When a borrower fixes the interest rate on their home loan, they are usually anticipating that the variable rate will rise above the rates they have locked in.

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At the end of the fixed loan period, you can decide whether to fix the loan again for another period of time at the current market rates or convert the loan to a variable interest rate for the remaining time left on the loan.

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Some key watch outs for fixed rate home loans

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• Limited Additional Payments: Depending on the lender, you may be allowed only limited additional payments towards your loan during the fixed-rate period.

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• Early Payout Penalties: If you decide to pay off your fixed-rate loan early, you may face penalties or break fees. These fees can vary depending on the lender and the remaining term of your loan.

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• Lack of Flexibility: Fixed-rate home loans typically offer less flexibility compared to variable-rate loans. You may not be able to redraw additional payments or access certain features during the fixed-rate period. 

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Split Loans

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There’s also a third option, known as a ‘split loan’. This involves dividing your loan into parts, with one part having a fixed interest rate and the other part having a variable interest rate.

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Every individual's circumstances are unique. Contact us to discuss your specific situation and explore the loan options that best suit your needs.