Finance

Fixed VS Variable Home Loan

July 17, 2020

Buying a home but unsure what home loan best suits you and your needs?

We have explained both types of loans, their advantages, and things to consider when choosing your home loan.

Fixed Home Loan

A fixed rate home loan means that you can lock in an interest rate for a set period of time which is normally up to 5 years, with some lenders it could be stretched out of up to 10 years. It can be beneficial when sticking to a budget knowing that your repayments will be the same for the set duration of the loan.

A fixed home loans can often offer certainty. Having a fixed home loan allows you to organize your budget. At the end of the fixed term, the loan will convert to variable unless you relock in a fixed term agreement.

Advantages

– You know how much your repayments will be for a fixed term
– Protects you against sudden interest rate increases
– You can choose how long your fixed term loan is for

Disadvantages

– You won’t benefit from a decrease in interest rates
– Pay more over the duration of the loan
– Not as flexible with extra repayments, each bank will have a maximum additional repayment limit (per annum).
– You cannot redraw any additional repayments you’ve made during the fixed rate period.
– Having a fixed term loan will not allow you to have an offset account.

Variable Home Loan

A variable rate home loan is a loan that its rate can fluctuate during the duration of your loan. Variable home loans are a more popular choice for a lot of home owners due to lower fees and more flexibility.

Advantages

– Make extra repayments without penalty
– Repayments can go down
– Benefit of interest rates going down
– You can redraw on any additional repayments you’ve made.
– You can set up an offset account, which will help you save on the interest you pay.

Disadvantages

– Your repayments will increase if interest rates increase
– Affordability of repayments if there is a rate increase

Split Loans

If you still can’t decide or are unsure of which loan best suits your needs there is another option which is called a split loan which is you can split your total borrowing amount in to two. Giving yourself this option can benefit you as having one half of your loan as fixed and the other half as variable.

Let’s say that you borrowed $500,000 over a 30-year term and fixed $300,000 at 3.90% per annum for 3 years and kept the remaining $200,000 variable at 3.59%.

Your fixed monthly repayments would be around $1,415 and your variable repayments would $908, bringing your total repayments to $2,323 per month.

After 6 months, your lender increases its variable rate to 3.79% p.a., bringing your total mortgage repayments $2,345, or an increase of $22 per month.

If you were instead to keep your home loan entirely variable, your repayments would have increased from $2,270 to $2,327, or an extra $57 per month.

Similarly, if the variable rate were to decrease to 3.40% p.a. on your split loan, your total repayments would decrease to $2,301, saving you $22 a month.

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