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?
What is a variable home loan?
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
- 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
- Higher interest rates than fixed interest rate loans
- Lender may increase interest rates on short notice
Should I lock in my mortgage rate now?
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?
Can I take advantage of both fixed rates and variable rates?
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!