Fixed or Variable Home Loan
Fixed or variable home loans – it's a question of certainty versus flexibility.
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There are two types of home loan interest rate, variable and fixed. In short:
- Variable interest rates can change at any time (up or down) and tend to offer slightly lower rates and more repayment flexibility.
- Fixed interest rates cannot go up (or down) for the fixed period (usually 1-5 years) but often have more fees and less flexibility.
Both rate types have strengths and weaknesses and it all depends on your needs as a borrower. It's usually a trade-off between flexibility on the one hand and certainty on the other.
Read on to find out more about the differences between fixed and variable rates.
Variable versus fixed interest rates: what's the difference?
Both variable and fixed rates have strengths and weaknesses and it all depends on your needs as a borrower. It's usually a trade-off between flexibility on the one hand and certainty on the other.
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Which rate type is right for you?
The real question is what do you want from your home loan. This helps you decide which rate type suits you best. Here are some examples to help you think about your own situation.
- I want to know exactly what my repayments are each month. You might want to go with a fixed rate loan. With the certainty of an unchanging rate you can budget safe in the knowledge that your repayments won't vary. This means you can basically forget about your home loan for the fixed period.
- I want the lowest possible rate and I'm happy to switch lenders. Go with a variable loan (probably). Variable rates are usually more competitive than fixed rates, although that's not always the case. But if you're a deal hunter who's always after a lower rate and is happy to compare and refinance regularly, then a variable mortgage probably gives you more options and is easier to refinance.
- I want to repay my loan as quickly as possible. In this case you want the lowest interest rate and a mortgage which allows for extra repayments. This is more likely a variable rate but some fixed rate loans allow extra repayments too.
Split rate loans
If you really like the idea of fixing your interest rate, but you don't want to lose the flexible features available on your variable loan, you can choose to split your home loan. A split rate home loan is when you divide your loan into two (or more) portions; one locked into a fixed rate and the other variable.
This lets you enjoy some of the advantages of both rate types at the same time.