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Fixed rate home loans offer security and stability, while variable rate home loans offer flexibility and a range of additional features.
There’s no one-size-fits-all solution here. The best home loan for you will have a lot to do with your personal circumstances and preferences.
If you’re weighing up between fixed and variable interest rates, here’s a quick rundown of the pros and cons of each.
With a fixed rate home loan, your interest rate will be locked in for a specified period – typically one to five years. Knowing exactly what you need to pay may be helpful for planning and budgeting purposes.
A potential downside to fixed rate loans, however, is that they can be inflexible. For example, some institutions may prevent you from making extra repayments, or charge you a fee for doing so.
Similarly, if you suddenly find yourself flush with cash and able to pay off your loan sooner, or need to break the fixed interest period for any reason, you may have to pay a substantial break fee. For this reason, fixed home loans work best for people who can reasonably expect their circumstances to stay the same for the fixed term.
At the end of the fixed period you may have the option of committing to another fixed rate, reverting to variable interest, or refinancing.
With a variable interest rate home loan, interest rates can fluctuate based on the official cash rate set by the Reserve Bank of Australia (RBA) and your lender’s discretion.
There are generally two types of variable loans: standard and basic.
To get an estimate of the overall cost of a fixed versus variable home loan, try iSelect’s handy Loan Comparison Calculator. Or, see how much time and money you could save by making regular additional contributions to your home loan with the Extra Repayments Calculator.
Rather than choosing between a fixed or variable loan, some people decide to hedge their bets and split their home loan. This means they pay a fixed rate on one portion of the loan, and a variable rate on the other portion.
A split loan offers a bit more certainty over repayments than a fully variable rate, while still allowing you to take advantage of any interest rate cuts.
As you can see, fixed and variable home loans both have their benefits. The advice and up-to-the-minute market knowledge of a qualified mortgage broker can be invaluable when it comes to deciding on the best home loan for your needs and budget.