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Fixed vs variable home loans

Date: Feb 11th, 2016

If you’re about to buy a house or you’re looking to refinance you may be asking yourself, should I fix my home loan or not? Especially with interest rates at an all time low.

Here are some things to consider to help you decide.

What you will gain by fixing your home loan

Fixed rate home loans are usually for a set period of time – often 1, 3 or 5 years.

Here are the advantages of fixing your loan:

  • Makes budgeting easier – You know exactly what you’re repaying. Whereas with a variable rate loan your repayments can ‘vary’ as rates change. See our budgeting tips.

  • Rate rises don’t matter – If interest rates rise above your fixed rate, you will be happy knowing you are paying less than the variable rate.

What you will lose by fixing your home loan

Here are the disadvantages of fixing your home loan:

  • Rate drops will annoy you – If rates go down below your fixed rate you will be repaying more than the variable rate and you won’t benefit from the rate drop.

  • Can you make extra repayments? – Extra loan repayments are often not allowed if you have a fixed rate, or may only be allowed with a fee. Variable rate loans usually allow you to make extra repayments at no cost.

  • Break fees – Fixed rate loans may also have a break fee if you change or pay off your loan within the set period e.g. if you sell your home

Check all the terms and conditions of the loan so you know what you are up for. See our information on the fees you could pay for fixing your loan and how to check a credit contract.

Splitting your loan

Another option is to make a bet both ways and only fix part of your home loan.

Some people fix 50% of their loan and keep 50% as variable to manage some of the risk of interest rate rises while still being able to make extra repayments.

Case study: Adam and Matti decide to fix part of their home loan

Adam and Matti have saved up a deposit and want to borrow $240,000 for a $300,000 apartment.

Using MoneySmart’s mortgage calculator they work out what their repayments will be for a fixed or variable rate loan:

  • Fixed rate loan – If they fix their rate for 3 years at 5.50% their repayment will be $1,484 per month.

  • Variable rate loan – If they choose a variable rate loan at 5.25% they will be repaying $1,448 per month at first. If the bank increases the variable rate by 0.5%, they will be repaying around $1,520 per month.

The fixed rate will cost them $40 more per month to start with but it will save them money in the future if the variable rate increases. The variable rate is tempting because they would pay less right now and have the flexibility to make extra repayments without fees.

However, Matti and Adam know their budget will be tight over in the next couple of years (they plan to travel and get married) and think they will be stressed if there is a big jump in mortgage payments.

They decide to fix two-thirds of their home loan for 3 years so they can still make extra repayments if they have extra money.

No one can accurately predict how interest rates will move but as long as you’re happy paying the amount on a fixed rate loan, and you don’t need the flexibility of making free extra repayments in the short term, a fixed rate loan is a reasonable option.

Reproduced with the permission of ASIC’s MoneySmart Team.

This article was originally published on ASIC’s MONEYSMART website

Important note: This provides general information and hasn’t taken your circumstances into account.  It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Any information provided by Mortgage and Finance Association of Australia (MFAA) detailed above is separate and external to us and our Licensee, AMP Financial Planning Pty Limited. Neither we, nor AMP Financial Planning Pty Limited take any responsibility for their action or any service they provide. 

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