Variable vs Fixed Rate Home Loans: What’s the Difference?
Fixed rate home loans offer the comfort of a stable interest rate, but you’re missing out on all the benefits of flexibility and savings that a variable loan could bring your way, so let’s break it down.
Fixed Rate Home Loans
- Financial Stability: The rate of interest is fixed for the term of the loan, so your repayments remain the same regardless of fluctuations in the cash rate.
- Less Flexibility: The flexibility to switch to a variable loan, make an early repayment of the loan, or add extra repayments normally comes with hefty costs.
- Fewer Features: Fixed rate home loans typically do not come with offset accounts or redraw facilities, which can be valuable for savvy homebuyers.
Variable Loans
- Variable Interest Rate: The available interest rate can increase or decrease with changes in cash rates set by the Reserve Bank of Australia and decisions of your financier. While there is potential for savings, there’s also financial uncertainty.
- More Flexibility: Variable loans allow you to switch between loans easily and make overpayments without any fees.
- More Features: You will usually have access to benefits like offset accounts and a redraw facility, which can help reduce the interest burden and give you more control over your money.
What’s Happening with Cash Rates?
The cash rates have remained stable since November last year, providing homeowners with a slight reprieve. Experts predict a potential drop in rates before the year ends, which could be an opportune time for those with fixed rates to reconsider their options.
Should You Stick with a Fixed Rate Home Loan or Switch over to Variable?
As a first step, it’s important to talk to your lender before deciding whether to stay or switch. Be prepared for prevailing variable rates to be 1-2% higher than your fixed rate, and keep in mind that future rate rises are possible.
Here are some basic questions to ask your lender:
- What fees apply if I cancel my fixed loan and switch to a variable one?
- What variable loans do you offer, and what are their current interest rates?
- Do these variable loans include features like redraw or offset facilities? Will I pay extra for them?
- What are the costs if I decide to switch to a different lender?
After gathering all the facts, crunch the numbers to compare your fixed and variable loan options. While variable loans can offer more features, a fixed loan might still provide similar savings if interest rates rise again.
Consider the Future of Cash Rates
Take time to read expert opinions on where the cash rate from the RBA is heading. Pay attention to inflation and economic outlook, as these factors provide a long-term perspective. You may also want to discuss this with people who have made the transition from fixed to variable loans.
What to Expect When You Switch to Variable
Switching to a variable loan means RBA cash rate announcements will become more relevant to you. With features like offset accounts and redraw facilities, you can take control and make the most of any extra repayments.
We’re Here to Help
Whether you are staying put or ready to make the switch, Loan Junction is here to assist you through this transition. We connect you to the home loans that best suit your needs, working with the most reliable banks in Australia and specialist lenders. Our team of experts is available to guide you at each step, making your progress seamless.
So, do not wait any longer. Call Loan Junction today and let us help you find the perfect home loan solution.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.