Variable vs Fixed interest rate home loan
I thought it timely to revisit this often discussed topic given current low home loan interest rates. Both types of loans have their advantages and disadvantages.
The interest rate of a variable rate loan will go up and down based on changes in the Reserve Bank cash rate and your lenders cost of funds. Over the term of your home or investment property loan you will experience rates going up and times when they are coming down. The key challenge is managing your repayment when rates are on the increase. If you start today with a rate of 4.5% and in five years time the rate is 6.5%, the difference in your home loan repayments will be significant. On the plus side variable rate loans are more flexible in terms of making additional repayments, having a redraw facility and offset account.
A fixed rate home loan provides certainty of repayments over the fixed term regardless of interest rate movements. Whilst this is beneficial when rates are rising, when rates are falling you may be stuck at a higher rate for an extended period of time. Fixed rate loans have less flexibility if you want to pay extra off your loan and have limited if any redraw facility.
The choice of a variable or fixed home loan is often related to the borrowers desire to have certainty in their repayments. If you don’t want to worry about possible increases in your home loan repayments over the next few years, then fixed rates could be a good option to consider. If you’re not concerned about increases in your home loan repayments and want the flexibility to pay extra, use a redraw facility or an offset account, a variable rate loan may be a better option. Trying to beat the market either way is difficult.
If you’re not sure which is most suitable for you, please contact me and we can help you. paul@halogenhomeloans.com.au
Leave a Reply