I hear this question most days from my clients – should I take out a fixed rate or a variable rate home loan?
The answer is – it depends!
To help you decide – let me explain the difference between a fixed rate home loan and a variable rate home loan.
- A fixed rate home loan effectively locks in your interest rate for a set period of time. In Australia, the most common fixed rates are between 1 and 5 years. Once a fixed rate expires, you could either refinance your home loan to another fixed rate or let it revert back to the variable rate.
- A variable rate home loan will fluctuate in line with market forces, causing your interest rate to go either up or down over the life of your loan. This will depend on the Reserve Bank of Australia’s interest rates decisions and your banks pricing policies.
There are a number of pros and cons for both.
For fixed rate home loans – you get certainty!
- You know what the repayments will be for a set period.
- Your interest rate will not increase, but it will not decrease either.
- Offset accounts and redraw facilities are limited at best.
- Potentially large break costs if you exit during the fixed period.
For variable rate home loans – you get flexibility!
- Your repayments are highly likely to vary over the life of a 30-year loan.
- Your interest rate could increase or decrease.
- Offset accounts and redraw facilities are fully functional.
- Minimal discharge costs should you decide to switch lenders.
There is also a third option for clients who want the best of both worlds – split rate home loans!
With a split rate home loan, you have the ability to have both a fixed rate and a variable rate.
The point I am trying to make is that there is no silver bullet to the fixed or variable interest rate debate. Each individual will have their own set of unique circumstances and goals that need to be considered when creating a finance strategy.