Fixed or Variable
Fixed OR Variable Rate -
The toughest loan decision of all: whether to lock in an interest rate. A fixed rate gives you security, but a variable rate can add to your flexibility and cut your costs. As you begin looking for a home loan, you’ll come across two main types of loans: fixed and variable.
Which one you choose depends on your finances, the features you need in a loan, how long you plan to own the property and whether you believe interest rates will rise or fall. The good news is that as competition has intensified, the gap between fixed and variable rates has all but disappeared.
Fixed –
With fixed interest loans, the rate is set for a specific period – usually 1 to 5 years. At the end of that time, the loan reverts to a variable rate or you can renegotiate a further fixed term. By locking in your home loan, you are protected against rising interest rates. And your monthly repayments remain the same throughout the fixed-interest period.
On the down side, fixed loans have fewer features than variable loans, are expensive to break and can attract a slightly higher interest rate.
Ask yourself:
- Do you need predictable repayments?
- Do you anticipate any major changes to your family arrangements, job or business?
- Do you believe rates will rise in the near future?
- Are you buying an investment property?
- If you answered yes to most or all of these questions, a fixed rate loan may suit.
Variable
Basic Variable –
These loans are the banking equivalent of no-name supermarket brands. The big attraction is the low rate – up to two per cent less than standard variable or fixed rates. For that you get a no-frills loan, with fewer features than a “standard” loan.
But basic loans have changed in the past few years. Most lenders now allow early repayment and fortnightly payments on some of their “basic” loans – so check the fine print carefully.
Standard Variable –
Most standard variable loans feature accelerated repayment options, offset, redraw, split loan capacity, variable repayment schedules and portability. If you don’t plan to use most of these features, you are paying for window dressing and may be better off with a basic or fixed loan.
- Rates can rise or fall at any stage
- Very sensitive to economic conditions
- Picking the next move in interest rates is very difficult
- Very flexible
- The most popular form of loan
- Competition between banks is intense so the spread of rates is small
- Big savings when rates low
Split Loans –
If you’re not sure about interest rates, but dislike the inflexibility of a fixed rate, you can hedge your bets with a split variable/fixed loan. You get the advantage of early repayments, redraw and mortgage offset, without exposing all of your loan to fluctuations in interest rates.
How you split the loan is up to you but a 50/50 or 60/40 split is most common. Again, be aware that penalties apply if you quit the fixed portion of the loan early.
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