For every mortgage broker, the age-old question is what is better fixed or variable? Unfortunately, the answer is not as simple as it may seem, it all depends on the strategy you are wanting to accomplish. Let us briefly explore what they are and list the pros and cons of each so that we can make an informed decision.
The variable interest rate changes with the market if the cost of funds have increased your repayment and rate will move accordingly. The reverse will apply if the cost of funds reduces.
Some of the advantages to variable rate:
- Potential to save thousands on interest
- No Associated Break Costs
Flexibility on your Loan
Most lenders will either provide you with an offset feature or redraw facility which will allow you to make additional repayments as you desire and the ability to withdraw those funds when required later down the road i.e. holidays, Christmas and so on.
Option to Save on your Home Loan
The more funds you have available in the home loan the greater it will offset the interest payable on the remaining balance, remembering interest is calculated daily, therefore, this could potentially save you thousands and reduce life of the loan.
No Associated Break Costs
The variable loan does not have any associated break costs other than government mortgage transfers fees and discharge fee (the amount required by the lender to process the discharge of loan is $395).
Sounds good right, variable is an awesome option to pursue. However there are a few reasons why people opt out of variable home loan rates. They include
- Initial Higher Rate
- Difficult to Budget For
One of the biggest reasons why most would opt out of variable is the fact the rates are generally higher than the fixed options available especially when the deposits are smaller, generally the variable is priced in collation with the equity available in the transaction whereby the fixed is a consistent price for most equity levels.
The other downside to variable rates is the difficulty to budget as loan repayments could fluctuate month to month. If you are already at the limit with repayments/commitments any minor changes may make it more difficult for you.
Summary of Variable Rates
In summary, the benefits of variable rates on your home loan include unlimited redraws, unlimited extra repayments, reduce the interest payable over the life of the loan and easier to switch between lenders. The downside will be the inability to budget accurately and generally higher rates especially for those borrowing above 80% of the value of the property.
The fixed rates offer an interest rate locked in for a desired period between 1 and 5 years, but some do offer 10-year fixed rates. The longer the fixed interest term the higher the interest rate as it will be more difficult to predict the market conditions in 10 years’ time
At the end of the fixed term, your loan will automatically revert to a variable rate. During this time, you will have new options available, either re-fix the loan at the same lender, explore new fixed rates at other lenders or explore other variable options that may be available.
Home Buyers Benefits
Our experience has found generally first home buyers prefer the fixed-rate options to two main reasons:
- Easier budgeting of monthly expenses due to the consistency of payments
- Sharper rate than the variable at the time of inception especially when borrowing above 80% of the value of the property (smaller deposit).
We have also found that our investor client’s also like the fixed-rate option, they prefer the set and forget approach whereby they will know how much their repayment is every month and prefer not to have to think about it.
One of the biggest reasons investors prefer fixed loans is because they do not have the intention of making any additional repayments to their investment. Often instead they prefer to make any additional repayments on their owner occupier.
Disadvantages to Fixed Rates
The disadvantage, of course, will be in the event if rates reduce, your interest rate will remain high whilst the variable has dropped lower than your fixed rate. The second disadvantage will be the associated break costs when wanting to break your contract with the lender midterm.
Split Loan at Melbourne.Finance
Now that you know more about fixed and variable, your thinking that you like both! Well! Why not both!?
Regardless if you are an investor or owner occupier you can see the benefits of both. We have found some of our clients fix 70% of their loan and leave 30% variable, some do 80/20 and some even 50/50 splits depending on their goals and objectives.
This option will provide you with an attractive rate with the smaller deposit/equity in the transaction plus the flexibility to make extra repayments. This way you can truly mitigate the risks of both options.
Find out which option best fits your situation, give us a quick call or drop a quick email, we’re happy to chat.