One of the most significant decisions when choosing a home loan is whether you want to fix your interest rate or opt for a variable interest rate. There are pros and cons to both, and if you can't quite choose between them, you could always consider splitting your home loan.
Understand the critical differences between a fixed or variable home loan and some factors that may help you decide which is right for you.
The main difference between a fixed or variable home loan is that a fixed home loan locks in the interest rate at the time of signing up for the loan for a period of between one and five years. However, a variable rate home loan leaves the interest rate open to change if interest rates decrease or increase.
Certain home loan features and benefits are available with a variable home loan that aren't available with a fixed-rate mortgage. But these features can sometimes also come with extra fees.
The most significant benefit of having a fixed rate home loan is that you know what your mortgage repayment will be for the whole time your interest rate is fixed. This means that your repayments won't change if interest rates change, but this could be good or bad, depending on if interest rates increase or decrease.
If having the certainty of knowing what your repayments are is important to you, you're likely to go for a fixed vs variable home loan. But there are some factors that you’ll miss out on when you choose to fix your home loan.
When you choose the certainty of mortgage repayments with a fixed rate home loan, you lose:
There are few benefits to choosing a variable home loan over a fixed home loan with the prospective savings if interest rates decrease. You can also easily refinance your home loan, make additional repayments or pay out your home loan in full at any time without penalty.
You're also likely to find a more extensive range of home loan features with a variable rate home loan.
Features available with variable home loans that often aren’t available with fixed home loans:
Lenders each take their own view when it comes to the fees for these features.
The flexibility of a variable-rate home loan does swing both ways, you could save on interest if rates go down but you could also pay more if rates increase. The possibility of an interest rate increase should be included in any budgeting you do for your home loan repayments.
There is a way to get the benefits of both a fixed and variable rate home loan; it's called splitting your home loan. This means that you take a portion of your loan amount and apply a fixed interest rate, and the rest of the loan amount has a variable interest rate.
You could choose to split your loan 80/20 with 80% of the loan amount under a fixed interest rate and 20% under a variable interest rate. You can access the benefits of a variable interest rate like having an offset account, making extra repayments or just benefit from lower interest rates if they change. At the same time, you have the peace of mind of knowing part of your mortgage repayments will remain the same even if interest rates increase.
Whether you choose to go with a fixed or variable home loan or split your loan, you should always make sure you understand all features, benefits and risks of each. If you're looking to compare fixed or variable home loans, check out Yard's range of home loans here.
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