Fixed or Variable Rate Home Loan

Fixed or Variable Rate Home Loan?

Deciding on your mortgage type and options is one of the most important—and sometimes confusing—tasks when purchasing a home. One critical decision is choosing between a fixed or variable rate loan. Both offer unique advantages and disadvantages depending on your circumstances. Here’s 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 (typically 1-5 years). This means you’ll know exactly what your repayments will be during this period, making budgeting and planning much easier. You’ll have peace of mind knowing that your interest rate won’t change, eliminating any surprises in your repayment amount.

Cons

Fixed-rate home loans are not as flexible as variable rate loans. If interest rates go down, you can’t take advantage of the lower rate. Additionally, many lenders may prevent you (or charge fees) from making extra repayments, paying off your mortgage early, or switching to another type of loan. Fixed home loans work best if you expect your circumstances to stay the same for the term and are comfortable without flexibility.

Variable Rate Mortgages

A variable rate home loan has an interest rate that can vary, usually in line 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 and against you.

Pros

Variable home loans are generally much more flexible than fixed rate loans. They typically allow you to:

• Benefit from a reduced interest rate if official rates decrease
• Make extra repayments at no extra cost
• Pay off your loan early
• Use an offset account
• Access a redraw facility or line of credit

Cons

Variable rate mortgages are more uncertain than fixed rate loans. If interest rates increase and you’re not prepared, this could cause financial hardship. You need to consider the potential variances in interest rates.

Types of Variable Rate Home Loans

• Basic: As the name suggests, this type of loan has fewer features and less flexibility but usually offers a lower interest rate.
• Standard: Standard variable rate loans can come with more features and flexibility but often come with a higher interest rate.

Making Choices

No one can accurately predict how interest rates will change. The best way to decide on the type of loan 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 bets by splitting your loan between fixed and variable rates. This allows you to lock in a fixed interest rate for a portion of your loan while keeping the remainder at a variable rate. The portions and time frames can vary. The best option is to discuss this with your mortgage broker.

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At JKL, we’re here to support you through every step of your home buying journey. Our experienced team will help you understand your options and make the best choice for your needs.

Experience our JKL real estate family. We’ll put the welcome mat out for you!