Fixed rate vs Variable Loans
Find the right home loan type for you
Fixed rate loans
Fixed rates are locked in for an amount of time that is prearranged between you and your lender – this could be a term of one to ten years depending on the lender. Three and five-year terms are generally the most popular for borrowers because a lot can change in that time.
However, fixed rate loans usually come with a few provisos. Borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early, selling the property or switching to variable interest during the fixed rate period. Also, you may not be able to leverage an offset account against a fixed rate loan.
Borrowers should consider, and be aware, that at the end of the fixed-rate term the loan will usually ‘revert’ to a variable rate. Borrowers should talk to their mortgage broker when the end of fixed rate term is approaching as lender offers may not apply the lowest interest rate they offer when a loan reverts to a variable rate.
Benefits of fix rate
A fixed rate loan is one that maintain the same interest rate over a set period of time regardless of market fluctuations in interest rates.
Can offer stability for those conscious of a budget and who want to take a medium-to-long term position on a fixed rate. It can also protect borrowers from the volatility of potential rate movements.
Variable rate loans
The interest rate on a variable rate loan can change throughout the term of the loan in reaction to market fluctuations in interest rates. The interest rate on a variable rate loan can go up or down.
A variable rate loan may come with features such as an offset account (which can reduce the amount of interest you pay), a redraw facility and the ability to make additional repayments either regularly or in a lump sum.
A variable rate loan can offer flexibility; however, borrowers should consider the capacity to service the loan if the interest rate increased.
A Split loan – Flexible option
A loan can also be a “split loan”– this option allows you to have some of your loan at a fixed rate and some at a variable rate and may be great if you need to customise for loan based on your specific needs. You can split your loan 50/50 or at a ratio that meets your needs. For more information seek further advice from our Shire team, as choosing to go with a flexible option can vary for each loan applicants.
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