| Fixed or Variable Rate Home Loan?

Deciding on your mortgage type and different options is one of the most important, if not confusing tasks of purchasing a home. 

One very important factor is to choose between a fixed or a variable rate loan.  Both offer unique advantages and disadvantages depending on your circumstances.

There’s no one-size-fits-all solution.  Here is a summary of the pros and cons of each.

Fixed Rate Home Loans

Pros
A fixed rate mortgage allows you to lock in an interest rate for a set period of time.  (Normally 1-5 years).  Enabling you to know exactly what your exact repayments will be over this time.  This is great for budgeting and planning.  You have the piece of mind knowing that your interest rate will not change and there won’t be any surprises to your repayment amount.

Cons
A fixed rate home loan is not as flexible as a variable rate home loan. Firstly if interest rates go down you won’t be able to take advantage of the lower rate.  Also many lenders may prevent you (or charge fees) from making extra repayments, paying your mortgage off early, or even changing to another type of loan.

Fixed home loans work best if you expect your circumstances to stay the same for the fixed term and are happy without the flexibility.

Variable Rate Mortgages

A variable rate home loan is where the interest rate of your loan can vary.  Normally inline with movements in the official interest rate  set by the Reserve Bank.  This means your interest rate can rise or fall over the term of your loan, which can work both for you and against you.

Pros
Variable home loans are generally much more flexible than fixed rate home loans.  You will normally be able to:

• Reduce your interest rate if official interest rates decrease
• Have the ability to make extra repayments at no extra costs, 
• Pay off your loan early, 
• Use a offset account, 
• Have a redraw facility or line of credit.

Cons
Variable rate mortgages are more uncertain than having a fixed interest rate loan.  If interest rates increase and you are not prepared, this could cause you some financial hardship.  So you need to take into account the variances in interest rates.

There are 2 types of variable rate home loans: 

Basic – As the name suggests, this style of loan has fewer features and less flexibility.  But will normally provide you a lower rate of interest.

Standard – On the other hand, standard variable rate home loans can come with all the bells and whistles, although you will pay a higher interest rate.

Making Choices
No one can accurately predict how interest rates will change.  So the best way to decide on the type of loan you want is to examine your personal situation, lifestyle and goals.  There’s no right or wrong answer, only the right choice for you.

Can I split my loan?
You can hedge your loan by splitting your loan between fixed and variable.  This allows you to lock in a fixed interest rate for a portion and/or a time period of your loan.  And have the remainder as a variable rate.  The portions and time frames can vary. 

The best option is to have a discussion with your mortgage broker.