One of the first and biggest decisions you need to make when you’re applying for a home loan is whether you want a fixed or variable interest rate. 

Your decision can depend on several factors, such as your financial goals, whether rates are predicted to rise or fall, and the purpose of your loan.

As a mortgage broker, I’ll talk to you about the options that align to your financial and personal objectives. Together, we’ll find the right solution.

A popular choice for a new loan is to lock-in an interest rate for a specific period, usually no longer than five years. You can then reconsider your options. Some lenders offer longer fixed-term periods but those products often come with higher interest rates.

If you’re seeking a mix of flexibility and certainty, we can look at a split-loan. These will allow you to set a percentage of your loan at a fixed rate. The remaining portion will be subject to the prevailing variable rate.

Let’s look at the specifics of these types of loans:

Variable Rates

Pros

• You have a range of repayment options with a variable rate loan. These include the capacity to pay off your loan faster without incurring a penalty. You can also select an offset account or a loan with redraw facilities. (These are usually used to pay for a big holiday, or school fees.)
• You enjoy greater flexibility with these loans. It’s easier to move lenders because you’re not locked into a deal with a fixed interest rate.
• Your mortgage is more affordable when rates fall. You can either save the money or keep the payments at the same level and pay more off the principal of your loan.

Cons

• When rates rise, your mortgage become more expensive. So you need some financial flexibility to handle those periods when rates increase. We can discuss how you might manage your finances using redraw and offset facilities.

Fixed interest rate

Pros

• With a rate that’s guaranteed, you’ll not be affected when interest rates rise. This gives you comfort around your financial stability.
• You have peace of mind. You don’t have to worry about whether you can afford your loan if rates suddenly took a sharp upward turn due to economic factors. Also, you don’t need to be anxious about your household budget or your overall lifestyle aspirations.

Cons

• You’ll not be able to pay off your loan faster than the prescribed schedule. Some lenders will let you pay extra but cap the total each year.
• Switching lenders will incur fees with a fixed rate loan if you want to switch before the end of the loan term. That’s a problem if you want to refinance to buy a new home, or you’re able to pay off your loan in full ahead of schedule.
• While you may apply for a loan at a certain rate, that rate might be higher when you settle on a property. If you want to avoid this, some lenders will apply a “rate lock-in” fee.

Split-rate loans

Often what borrowers decide to do is split their loan between a fixed and variable rate – so they have 2 loans for the same property.

Pros

• Dividing your loan into a mix of fixed and variable rates gives you additional peace of mind if you have long-term affordability concerns with a variable rate.
• You can enjoy all the flexibility and advantages of a variable rate loan, such as redraw facilities and offset account.

Cons

• You won’t be able to maximise the benefit of a falling interest rate.
• When the fixed-term portion of the loan expires, we need to check what interest rate you will be charged. Usually, it’s the standard rate. But that’s a little higher than introductory rates that first-home owners can access.
• It can be difficult and expensive to refinance to a cheaper loan because of the fixed-rate component. This is an important consideration given that a home loan is a long-term commitment and your circumstances will likely change.

This article is provided for general information only and does not take into account the specific needs, objectives or circumstances of the reader. Before acting on any information, you should consider whether it is appropriate for your personal circumstances, carry out your own research and seek professional advice.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice.