Fixed vs Variable Home Loans - Choose the right one to save thousands in the long run!

Choosing between a fixed or variable home loan in 2020 is an important choice that many Australians face. Whether you are buying a home this year or already own one and are looking to refinance, this question will always be asked of you. What you choose can mean the difference between saving thousands of dollars in the short term or long term.

Our guide will outline the difference between a fixed and variable loan and also walk through the pros and cons and any dangers you need to be aware of making any choices. As always, Reservoir Finance seeks to ensure you make an informed decision when choosing a home loan.

What is a fixed home loan?

A fixed home loan has an interest rate that does not change for an agreed period of time between you and the lender. This means if the Reserve Bank of Australia increases or decreases the interest rate (cash rate), the interest rate you agreed on signing the loan agreement will remain the same. Fixed interest rate home loans can last between 1 to 5 years.

What is a variable home loan?

A variable home loan has an interest rate that changes based on the lender’s discretion. Lenders usually change their interest rates when the Reserve Bank of Australia increases or decreases the interest rate (cash rate).

What are the pros and cons of a fixed interest rate home loan?

Pros of Fixed Interest Rate Home Loans

The benefits of a fixed interest rate home loan are:

  • Consistent repayments
  • Locking in low rates if you believe interest rates will increase

Cons of Fixed Interest Rate Home Loans

The negatives of a fixed interest rate home loan are:

  • Higher break fees when interest rates are falling – making it more expensive to refinance
  • Less features as you cannot take advantage of additional savings of offset accounts, extra repayments or redraw facilities
  • No flexibility when market interest rates drop
  • You will not have any ability to make extra repayments or park cash into an offset account

What are the pros and cons of a variable interest rate home loan?

Pros of Variable Interest Rate Home Loans

The benefits of a variable interest rate home loan are:
  • Access to more features such as offset accounts, extra repayments or redraw. Depending on your personal circumstances, this may save you more money than a fixed interest rate.
  • Take advantage of decreasing interest rates. In 2020, when interest rates are especially low, banks are facing fierce competition from each other and drop their interest rates to compete for customers
  • Easier to refinance as there are no locked-in contract or break fees

Cons of Variable Interest Rate Home Loans

The negatives of a variable interest rate home loan are:
  • Higher interest rates than fixed interest rate loans
  • Lender may increase interest rates on short notice

Should I lock in my mortgage rate now?

We at Reservoir Finance get asked this question a lot. If you want to take advantage of historically low interest rates for 2-3 years, then lock in your interest rates (July 2020). However if you have cash savings that will continue to grow over the future, it might not be better to lock it in. Do you know if the Reserve Bank will be raising interest rates or dropping interest rates in the near future?

There is also an important skill of trying to read and understand the Australian economy. We aim to educate and teach our clients how to read the economy so you can be confident in the home loans that you choose and allows you to easily answer the question of “should I lock in my mortgage rate now?”

Is it better to have a fixed or variable home loan?

It depends on your goals and personal circumstances. Fixed interest rate home loans are better when you prefer consistent repayment amounts, however, you generally have less access to banking features such as offset accounts, extra repayments or redraw. Variable interest home loans rates are better when you expect interest rates to decrease or if you require access to additional banking features (such as offset accounts).

Can I take advantage of both fixed rates and variable rates?

Yes you can! In most cases, you are able to choose a “split loan”. This means you can set a portion of the amount you borrow to be fixed and the remainder to be variable so you can take advantage of both fixed rate discounts and the variable rate flexibility.

For example, if you owe $500,000 on your current home loan, you are able to refinance a principal and interest loan with a bank (such as a big four which is currently offering competitive fixed rates and variable rates) and split your loan 60% fixed and 40% variable. In this example, let’s assume that a lender is offering 2.19% for fixed rate (for 2 years) and 2.79% for a variable rate (which also has offset, redraw and extra repayment capabilities).

This means you are taking out a $300,000 loan that is fixed rate AND a $200,000 loan that is variable rate. The $300,000 loan is able to take advantage of the 2.19% interest rate, whilst the $200,000 loan will be charged at 2.79%. Using our split loan calculator, this means your monthly repayments will be less than $1960/month for the first 2 years as opposed to paying around $2050/month if borrowing $500,000 at 2.79%.

Why do this? It depends on your personal circumstances. In the same example, if you had $100,000 in savings, you can deposit this into the offset account (linked to the 2.79% loan) which will decrease your combined monthly repayments to around $1550/month!

Can I get some help to decide what type of home loan is best for me?

Yes! We at Reservoir Finance would be more than happy to offer you an obligation free assessment of your personal situation, your goals and provide you with a recommendation of what type of loan is best for you. The split loan strategy is not for everyone as some people do not want to pay off their loans as quick as possible or have other special requirements (such as interest only or borrowing in a trust).

Reservoir Finance is one of Sydney’s premier mortgage brokers suitable for home owners and investors alike. Our values based approach means we will educate you on how the financial system works and how to read the economy. This will help you make great decisions about which home loans to choose. Contact us using the form below or phone us today for a free no obligation chat! We would love to help you out!


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