Fixed vs variable home loans: which one will work better for you?
Saving money to buy a home for the first time? About to put down a 20% deposit? You may have pondered the differences between fixed and variable interest rate home loans.
If you’re not sure what these options mean and how they can benefit you in different ways, read on. In our guide, we’ll give you the top-level differences and then go into more detail to help you make your decision.
The main difference between a fixed and variable home loan
With fixed home loans, interest rates are usually locked for an agreed period of 1 to 5 years. This means the repayments you need to make during this agreed period will always stay the same.
A variable interest rate is the polar opposite of a fixed one. The rate isn’t locked which means the interest rate on your home loan and, in turn, repayments could go up and down. This can be due to cash rate changes by the Reserve Bank of Australia (RBA), lender decisions and many other factors. Generally, if the RBA decides the cash rate is going up, the minimum amount you’ll need to pay on your mortgage will go up too — and vice versa.
To sum up, a fixed home loan is one where repayments don’t change.
A variable home loan is one where repayments do change.
Fixed rate home loans
If you like structure, predictability and being able to budget years into the future, a fixed rate home loan might be the right fit for you. Depending on the agreement you’ve made with your lender, repayment amounts you make will stay the same for the fixed term. There are a few upsides to a fixed rate home loan. First, you get consistency which means you can budget and plan for repayments years into the future. Secondly, a fixed rate home loan shields you from the harsh blow of rising interest rates.
But there are some downsides too.
If interest rates go below your fixed rate, this means you’ll be paying more than the lowered interest rate. Sometimes, fixed rate home loans don’t offer redraw facilities too. So you may not be able to get money out if you need it. And in many cases, you can’t make extra repayments.
Variable interest rate home loans
If you like flexibility, a variable interest rate home loan might be the right choice for you. While interest rates going up and down can be both an upside and downside, variable rate loans offer many features. Features that can help you meet the needs of your personal and financial life as it evolves.
If you happen to be making more money and want to work down your mortgage sooner, you have the option of making more repayments. And if you happen to get yourself in a fix or need money, the redraw capability of a variable loan lets you pull funds as and when you need them.
The Mac’s fixed rate home loan
At The Mac, our fixed interest rate home loans are a little different. With most fixed rates on the market, the locked period is usually between 1 and 5 years. With us, you can choose, 1, 2 or 3. You can also make extra repayments too, just like a variable rate home loan and have access to any extra funds through the free redraw.
Which is better? Fixed or variable? Or a combination?
One isn’t better than the other. Whether you choose fixed or variable comes down to personal preferences and needs. A combination where you assign a chunk of your mortgage to fixed and another to variable rates is also possible. This can help you through unpredictable economic conditions.
After all, who could have guessed that not too long ago, the entire world economy would shut down due to a worldwide pandemic. Or that the RBA would drop the cash rate from 0.75% to a historic low of 0.10%! Nobody has a crystal ball.
If you want a home loan that works for you, your circumstances and rapidly changing economic conditions, we’d be happy to advise. Just give us a call on 1300 622 278 now or visit one of our local branches.
