Fixed vs Variable Home Loans 2022
When choosing a mortgage, the decision between locking in a fixed rate, opting for a variable rate or even combining the two is important. So how do you decide what is best for you?
What is the difference between fixed and variable home loans?
The terms “fixed rate mortgage” and “variable rate mortgage” refer to the two main types of mortgage rates on the market in Australia. The difference between the two comes down to the interest rate. When you take out a fixed rate home loan, the interest rate stays fixed instead of “fixed” for a fixed term, whereas when you take out a variable rate home loan, the interest rate can fluctuate, depending on the up or down depending on the decisions of your lender.
If you wish, you may be able to combine a fixed and variable rate home loan into what is known as a split rate home loan, potentially allowing you to take advantage of the features of both.
How does a fixed rate mortgage work?
A fixed rate home loan is a loan in which the interest rate you pay is locked in or “fixed” for a set period of time. This period of time can vary, but is usually between one and five years. When you take out a fixed rate home loan, you are guaranteed that the interest rate you pay from month to month will stay the same and not fluctuate.
At the end of a fixed term, you can choose to either switch to a variable rate home loan or refinance either a split rate home loan or another fixed rate home loan. You can usually break a fixed rate home loan sooner if you wish, although your bank or lender will likely charge you a break fee for doing so.
What are the pros and cons of a fixed rate mortgage?
Potential benefits of a fixed rate mortgage include:
- Rate Rise Protection: If interest rates rise, your repayments will remain constant, protecting you from rate rises throughout your fixed term.
- Certainty in your repayments: Knowing how much your mortgage will cost you each month can give you the flexibility and peace of mind to budget for other expenses.
- Ability to save on fees and charges: Variable rate home loans come with various extras, but these can be expensive, so if you’re happy without them, you can avoid some fees with a fixed rate.
Potential disadvantages of a fixed rate mortgage include:
- A lack of features: The features of an adjustable rate home loan can be handy. For example, an offset account can be used to reduce your home loan balance while accessing funds for day-to-day banking. Some fixed rate loans come with a withdrawal facility, but you’ll need to check with your lender to see if this is available.
- Potential to miss rate cuts: If interest rates go down, you won’t benefit if you’ve locked in your rate for a set period of time.
- Inability to make additional repayments: Variable rate home loans generally allow you to make additional repayments to pay off the balance more quickly, but one of the trade-offs for the certainty of a fixed rate is that you may not be able to make additional repayments. be not do it. You might be able to pay off your home loan balance early, but if you want to do that — or refinance with another lender — you might be charged a termination fee, which could be costly.
How does a variable rate mortgage work?
A variable rate home loan is a loan where the interest rate you pay is not fixed and can fluctuate depending on market conditions and the decisions of your lender. This means that your interest rate may go up or down and you could end up paying more or less from period to period. When deciding whether or not to change their interest rates, lenders generally look to the decisions of the Reserve Bank of Australia, as well as market forces.
Variable rate home loans usually come with more extras than their fixed rate counterparts. For example, they may have features such as clearing accounts and withdrawal facilities, which may allow you to pay off your home loan faster and reduce your outstanding repayments. They are sometimes accompanied by other extras such as credit cards and current bank accounts. It should be noted, however, that these features usually come with a fee.
What are the pros and cons of a variable rate mortgage?
The potential benefits of an adjustable rate mortgage include:
- Flexibility: The ability to make additional payments to pay off your home loan balance faster and reduce your interest payments using an offset account can be appealing.
- Potential for lower repayments: If your lender lowers interest rates, you have the potential to pay less on your mortgage month over month.
- Features: Variable rate home loans can help you streamline your finances with features like checking bank accounts and clearing and withdrawal facilities, and packaged extras like credit cards.
Potential disadvantages of an adjustable rate mortgage include:
- Potential for higher repayments: If your lender raises interest rates, you have the potential to pay more on your mortgage month-to-month, and rate increases could make your mortgage even more expensive in the future. over time.
- Uncertainty: Rate hikes can be a source of uncertainty, making it difficult to budget in advance if you don’t know how much your repayments might increase, depending on interest rates.
- Higher fees: Features like clearing and redrawing functions and bundled extras can be attractive, but keep in mind that these have the potential to increase the fees you pay.
Is the variable better than the fixed for mortgages?
There is no “best” choice between fixed and variable rate home loans, as both have pros and cons, so which is best will come down to your personal choice. If you’re worried that interest rates will rise in the months and years ahead, you might decide that the certainty of a longer fixed term is attractive, as it will protect you against rising rates. Conversely, if you’re not concerned about rate hikes and prefer the extra features that come with variable rate home loans, one of these may be the better choice for you.
You may even find that a split rate home loan, combining the two, is a choice for you. A split-rate home loan is essentially two separate home loans, one at a fixed rate, the other at a variable rate. Some lenders may let borrowers decide what percentage of the loan to keep fixed, and for how long, and what percentage to make variable. With a split loan, you could have the convenience of features such as offsetting accounts and withdrawal facilities, allowing you to pay off your mortgage faster, while having the certainty of knowing that part of your home loan is fixed. and won. t be vulnerable to rate hikes.
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