Is a fixed or variable rate loan right for you?
Choosing between a fixed rate or variable rate or a combination of the two can be baffling. Find out some of the key features of each
- Fixed rate loans - certainty but limited flexibility
- Variable rate loans - Flexibility is the drawcard
- Split loans - Would a split loan be right for you
- Comparison rate - how does it work
With interest rates at record lows many lenders are offering low fixed and variable rate home loans. You may be wondering if a fixed rate loan is right for you or whether you should go with a variable loan or a combination of the two. It can be baffling. Here we break it down and explain the differences.
Fixed rate loans
With a fixed rate loan you know exactly how much your repayments will be for the term of your loan, which can make it easier to budget, as your repayments won’t be affected by sudden interest rate changes. This is an ideal scenario if interest rates are rising however if they start moving downwards you could be left paying more interest than on a variable rate loan.
With a fixed rate loan you are locked in for the term you choose. That means if you want to exit your loan earlier or sell your property you could be left with significant break fees from your lender.
Depending on your loan, you may be limited if you want to make additional repayments or use features such as an offset account or redraw facility to pay your loan off earlier or stash some savings away.
Richard Winkett, Head of Product at BankVic says that many buyers may find fixed rate loans preferable over variable loans. “Knowing what your regular repayments are going to be can be an attractive feature, especially if you’re on a tight budget. If you’re not planning on selling and don’t have additional funds for early repayments then a fixed rate loan could work for you.”
Variable rate loans
Flexibility is the drawcard
The benefits of a variable rate loan tend to be the opposite of a fixed rate loan. Variable rates tend to move based on lending market changes which means your repayments can increase or decrease over time.
It’s much easier to exit a variable loan, so if you see better rate with another lender, you can refinance and save without costly break fees.
Variable rate loans also have more features like offset accounts and redraw facilities allowing a way to reduce the interest on your loan by depositing savings you have. At the same time enabling you access to your funds.
“People who have a bit more equity in their home and want to make additional repayments or put some money into their offset for a home renovation, holidays or simply to pay their loan off sooner could benefit from the flexibility of a variable loan.” Richard said.
Would a split loan be right for you?
Want the best of both worlds? You could look at splitting your loan so that a portion is in a variable loan and the other portion is in a fixed loan. This allows you to know what your repayments will be with the fixed portion whilst still enjoying the flexible features of a variable loan, such as the ability to make additional payments and offset accounts. If interest rates do reduce your repayments on your variable loan will go down.
So how does the comparison rate work?
The comparison rate is designed to show the true cost of a loan over its term. Whilst your interest is charged using the interest rate, the comparison rate includes the loan’s interest rate as well as upfront costs such as establishment and valuation fees and any ongoing annual or monthly fees. It’s designed to help you estimate the total cost of your loan per year and help you compare loans.
Do your research
Before getting a home loan it pays to do your research and shop around. Identifying what your needs are will help you work out the right loan will be right for you. Moneysmart is an informative site and a good starting point.
At BankVic our bankers can help you identify your needs and work out the right loan for you. Call us on 13 63 73 or visit bankvic.com.au to arrange a chat over the phone, in a branch, or at your home or workplace.
This article was published on 18 December 2020 and the information was current at that time. Normal lending criteria apply to all loan applications. The information in this article is general in nature and does not take into account your personal situation or needs. Please consider whether it is appropriate for you before acting on this information.