Depending on your personal preferences when it comes to managing money, different home loans best suit different people. Here we’re going to look specifically at variable rate home loans vs fixed rate home loans to find out which may suit you best.
What is a variable rate home loan?
A variable rate loan is where the interest rate can be changed at any time over the course of the loan, completely at the discretion of the lender. Over the full term of your home loan, the interest rate will rise and fall, changing the amount of your loan repayments at the same time.
What is a fixed rate home loan?
A fixed rate loan is where the interest rate is ‘locked in’ (or stays the same) for an agreed period of time. The fixed period is shorter than the overall loan term (typically 1, 2, 3 or 5 years) and at the end of this period, the loan will change over to a variable interest rate. This is, unless you decide to secure another fixed rate loan.
So, which home loan best suits your money management style?
Of course, everyone likes to select the option that will save them the most money! However, it can be difficult to get the timing precisely right with a fixed rate and even the experts get it wrong from time to time. There are some tools to help you pick a good time (you can read about them here), but it’s very important to base your decision on the overall features of the loan.
Choosing a variable rate or fixed rate loan really depends on your personal situation and how you like to manage things. Answer our questions below to see one which type of home loan may suit you ….
- Do you have a budget and like to stick to it?
- Do you like to know exactly what your loan repayments will be each month?
- Do you get worried when people start to talk about interest rates rising?
- Do you plan to keep your property for at least one year?
- Are you pretty sure you won’t win lotto this week?
- Whilst you acknowledge the benefit of making additional payments into your loan, do you find that any money left over at the end of the month after paying your bills, generally finds a way out of your bank account pretty quickly?
If you answered mostly ‘yes’ to these questions, then a fixed rate loan might be the one for you.
With a fixed rate loan, you’ll be able to accurately plan your loan repayments (they’ll be the same each month) and go to sleep each night free from worrying about interest rate movements. Since you’re not planning to sell your home or break the fixed rate period, you won’t need to worry about any break costs that are generally associated with a fixed rate loan. If you’re not currently in a position to make additional repayments to your loan, any fixed rate ‘additional repayment’ penalties will not be relevant.
If you answered mostly ‘no,’ then maybe a variable rate home loan will better match your personal money management style.
With variable rate loans, repayments rise and fall with interest rates. However, if you have the capacity to cover an increase in repayments, variable home loans can provide lots of useful features.
Things like the: the ability to make additional repayments at no cost; use of a redraw facility; use of an offset account to help you significantly reduce the interest costs over the life of the loan; and the absence of any ‘break fees’ if you decide to refinance or sell your property. There may be discharge fees, but these are not generally as significant as fixed rate loan “break costs”.
There’s also the chance that your repayments will decrease as interest rates fall, just like we’ve seen recently.
Having a home loan that suits your individual situation is important to helping you achieve your goals.
