Fixed rate vs Variable rate – Is it better to have a fixed or variable home loan?

Which is better for you – a fixed rate home loan or variable rate? How and why do borrowers choose between the two types of home loan?

There are definite advantages and disadvantages to both types of mortgage, so it’s important to understand their features before deciding which way to go.

Let’s compare variable rate home loans with fixed rate home loans.

Compare variable rate home loans

With variable rate home loans, the rates can go up and down in line with the cash rate. Variable loans may also offer the borrower more flexibility in terms of payments, as well as lower rates in most cases.

With a flexible rate loan, you’ll;

  • probably have access to a redraw facility
  • be more able to refinance or use an offset account
  • you’ll also have to keep watch on the cash rate during the entire term and be ready to switch if your payments get too high
  • may have lower establishment and maintenance fees, and
  • may have more flexibility to pay your mortgage off sooner.

Compare fixed rate home loans

Fixed rate home loans offer the security of no changes in repayments for one to five years, although some borrowers might watch enviously as the cash rate falls! On the other hand, they don’t need to worry about their monthly payments increasing.

These deals tend to have slightly higher interest rates and sometimes may not be as flexible with early repayments and overpayments.

If you choose a fixed rate home loan, you’ll:

  • be able to plan at least one year ahead as you know your payments won’t change
  • be able to just forget about the cash rate until the term is nearly up
  • be less able to make overpayments without penalties.

Choosing the right deal for you

Choosing between fixed rate and variable rate home loans can be tricky even when you do understand the differences. It’s all about striking a balance between the flexibility and (often) lower rates and the long–term certainty and planning.

Having said all this, you don’t always need all these features. If you’re looking for owner occupier loans because you’re planning to move into your forever home, then you might want to pay your mortgage off a few years earlier. On the other hand, if you’re looking for investor loans for a buy–to–let venture then you may want more predictability so you know what your profits will be.

Many flexible loans have lower rates, but if you want to clear a minimum amount of profit from your rental property then a fixed rate gives you more certainty, so may be worth paying a slightly higher but constant rate.

What you want from a mortgage?

1. I need predictable, stable monthly payments

In this scenario, you might like to compare fixed rate loans. You should spend some time on a comparison website so that you get a loan with an attractive interest rate.

U Bank

The UBank Fixed Rate Loan is an owner occupier principal and interest (P&I) loan that offers a 2.69 per cent pa (comparison rate 3.19 per cent pa) interest rate for three years, for example.

2. I want a low rate and I’m not afraid to chase it

If you’re a keen bargain hunter and you don’t mind searching and switching to maintain comfortable monthly repayments then you should look at variable loans.

Reduce Home Loans

Variable rate loans can have more competitive rates than fixed loans and if you’re agile and don’t mind refinancing regularly, then you could surf some great deals over the years.

Reduce Home Loans offers a variable P&I mortgage at 2.69 per cent (comparison rate 2.70 per cent pa) for owner occupiers and there’s no exit fee so refinancing is easy when the time comes.

3. I want to be mortgage–free as soon as possible

If you want to pay off your mortgage as soon as possible, then you might want to look for a lower interest rate and also a deal that allows you to make extra repayments.


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