Fixed rate home loans have a set interest rate for a standard period (usually 1, 3 or 5 years). After that, the rate defaults to the standard variable rate offered by the lender – which could be at a lower, similar, or higher rate.
Variable rate home loans have no set interest rate and can be adjusted by the lender. Generally, rate changes are aligned with the Reserve Bank, but lenders can alter rates independently. Over the course of a loan, the rate is likely to change many times.
There are pros and cons to each choice, so asking these three questions can make the decision easier.
1. Can you manage change?
Most people will consider whether market rates are likely to rise or fall in the coming years before deciding on a fixed or variable rate. Do the research and know your budget – if the thought of your home loan interest rate rising and falling with the market makes you nervous, a fixed rate loan may be more appealing.
With a fixed rate home loan, you know exactly how much your repayments will be for the term of the fixed rate. This can give you greater control, and make it easier for you to manage your finances. Many people taking out their first mortgage opt for a fixed rate, even for a short period, to get used to the home loan repayments being part of their budget.
2. How much flexibility do you need?
If you expect interest rates to increase in the future, it may seem obvious that locking in a fixed rate now is the best choice. However, there are differences in the terms and features of fixed and variable loans that are worth considering.
Do you plan to sell your home in the next few years? Would you like to be able to change your loan structure? Think about features that are important to you, like the option to make extra repayments or redraw additional funds.
Fixed rate home loans may:
If you need some flexibility, variable rate home loans can be easier and cheaper to change. You may also have the choice to make unlimited extra repayments and make unlimited redraws.
3. Do you have a savings plan?
If you have savings you won’t use to buy your home, or have a savings plan that means you’ll put money aside apart from your mortgage repayments, you may want to consider a variable rate home loan. Why? Variable rate home loans generally offer features that aren’t included in fixed rate home loan packages, so you can save on interest and pay off your loan quicker, even if the variable rate rises above what your fixed rate may have been.
These features can include unlimited extra repayments and the ability to attach an offset transaction or savings account. Offset accounts can be a useful way to reduce interest and secure some tax benefits.
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The Australian Government Guarantee, also known as the Financial Claims Scheme (FCS), provides protection for funds deposited in eligible financial institutions up to a limit of $250,000 for each account holder.
Following the decision by the Reserve Bank to reduce the official cash rate, QBANK will reduce interest rates on its variable rate home loan products for owner occupiers and investors by 0.15% per annum. Mortgage secured overdraft rates will also be reduced by 0.15% per annum.