Home loan options can be challenging for those unfamiliar with the fluctuations of interest rates. So how do you know which home loan is ideal for you: fixed or variable? Read on to learn more about what fixed and variable rates offer and the advantages and disadvantages of both.

Fixed vs. variable – what’s the difference?

Put simply, a fixed home loan has an interest rate that is anchored at a certain level for a set period of your choosing (options usually vary between one, three or five years). At the end of the agreed fixed term period, home loans will normally switch to your lender’s variable rate.

By contrast, a variable loan is not locked into a single interest rate, meaning it will move as the market changes. The interest rate of your loan will therefore rise and fall over its term and your repayment amount will vary.

What are the advantages of a fixed home loan?

  • The main benefit of a fixed rate loan is the certainty it provides, allowing you to budget accurately for the years to come.
  • Timed correctly a fixed loan can allow you to take advantage of low-interest rates, locking in before the market rate rises.

What are the disadvantages of a fixed home loan?

  • The nature of a fixed rate loan makes it inflexible. Once you’re locked into this loan type it is difficult and often expensive to break out.
  • Fixed rate loans often have limits on extra repayments, they may be capped at a low amount or only allowed with a fee. This means you are unable to pay off your loan faster.
  • While you are protected from an increase in interest rates, you are also unable to take advantage of any future drops. You have to make a gamble as to whether now is the best time to lock in.

What are the advantages of a variable home loan?

  • The main benefit of variable loans is flexibility. Though you have to meet monthly repayments, you can also contribute more money if you choose to and so pay off your loan faster with less overall interest.
  • Variable rate loans often have more features at your disposal. They usually allow unlimited redraws on additional repayments and the ability to set up an offset account to help save up interest.
  • Variable loans often give you the flexibility to switch loans if you find a better deal.

What are the disadvantages of a variable home loan?

  • Crucially, the minimum repayment amount rises and falls all the time. This makes it difficult to plan and may make finances tight in certain market fluctuations.

If you would like more information on home loans, contact us today.