Fixed Or Variable Loans

March 21st, 2019 - by Brad Gillespie

Deciding whether to opt for a fixed rate or variable home loan is always a bit of a gamble.

Even with the best advice, you can never guarantee which way interest rates will go. Here are the main things to consider when weighing up your options.

When interest rates are low, the temptation is to stick with a variable home loan and hope that nothing changes. It’s usually when rates go up – and we start feeling the pinch – that borrowers begin eyeing fixed rate options. By then it’s usually too late and you risk locking in a rate at the top of the loan cycle. If you’re a first-time home buyer or investor, you need to think about what will best suit your needs in the early days of your loan.

Pros and cons of fixed rate loans

Typically, fixed-rate loans have higher interest rates. In return, they give you the security of knowing exactly what you will pay for the fixed term of your loan, usually one, three or five years. This can be critical if you are financially squeezed and worried about the mortgage stress a rate rise could cause. If rates go up during your fixed period, you won’t be affected.

Fixing makes it easier to budget, as you know exactly what you’re paying each month. This can be particularly valuable for first-time buyers adjusting to all of the costs of becoming a homeowner or property investor. It gives you a bit of a cushion and safety net while you work out what you can realistically repay each month.

On the flip side, if you do decide to fix your loan, you need to make sure you understand all of the terms as there are typically restrictions that don’t apply to variable rate loans. You may be unable to make extra repayments, which is never ideal if you think you could be in a position to pay off your loan faster. You could also discover that there’s an expensive “break fee” if you pay off your loan before the fixed-rate term ends. Many fixed-rate loans also do not offer the flexibility of a redraw facility.

Of course, the biggest potential downside to a fixed rate loan is that should rates go down unexpectedly you’ll be stuck paying a higher rate than with a variable loan.

The pros and cons of variable loans

Variable loans generally offer lower interest rates. But, while they position you to take advantage of any drops in rates if rates go up, so do your repayments.

Other positives of a variable loan are that they are typically more flexible and offer more features, such as the ability to make extra repayments and have a redraw facility. It’s also easier to switch home loans if you want to take advantage of a better deal, and you won’t be penalised if you pay off your loan early.

Ultimately what’s right for you will depend on your own circumstances. Seek advice from a mortgage broker if you’re unsure.

Be prepared before house hunting

Whichever way you go, it’s really important to be finance ready when you’re house hunting. With the tighter lending conditions now in place, we are seeing financial pre-approval taking a lot longer for our clients. The amount buyers are able to borrow is lower than what they might have been pre-approved for 12-24 months ago.

This means, if you’re looking without your finance in place, you could be in for disappointment. You could also miss out on a great deal or your dream home if you’re not ready to make an offer while your competitors have their finance sorted.

Contact me today if you’d like more advice on getting pre-approval and your home search in Sydney’s inner city.