Fixed vs variable mortgage
Should you choose a fixed rate or variable mortgage?
At AFM, we know one of the biggest decisions you’ll make when applying for a loan is whether to choose a fixed rate or variable mortgage. There are benefits and drawbacks to both types of loan, the key is making the right choice for your particular set of circumstances.
Advantages of a fixed rate home loan
The main advantage of a fixed rate home loan is the certainty it gives you. Your repayments will be exactly the same amount every time so it will be easier for you to budget. By fixing your mortgage you don’t have to worry if interest rates increase, your repayments will remain the same for the duration of your fixed loan term.
Disadvantages of a fixed rate home loan
Of course, the main advantage of a fixed rate mortgage, is also the main downside. Fixed home loans tend to be less flexible than variable ones. Your interest rate is locked in on approval for a set term—usually 1, 2 or 3 years—and you are liable for exit fees if you want to break the term. If you want to make unscheduled repayments or pay extra into your loan account to reduce the principal you may also be charged a fee.
What are break fees?
Fixed interest rates are calculated on your lender’s prediction of likely interest rates over the duration of your term. Generally speaking, if they anticipate interest rates will increase over the length of the lending term, the fixed interest rate will be slightly higher than current variable rates. Similarly, if they expect rates to decrease, your fixed interest will be set slightly lower.
If you close your loan, want to switch to a variable rate or pay a large sum into your mortgage, you will be charged a break fee for breaking your contract. These fees are intended to compensate your lender for any loss that has been factored into your contract.
Advantages of a variable home loan
Variable home loans are more flexible than fixed. They allow you to make extra repayments into your account at no extra cost. This can potentially save you thousands in interest and help you pay your loan off quicker. Variable loans often come with extra features such as a redraw facility or an offset account. It’s usually cheaper to switch a variable loan than break a fixed loan, if you find a better deal elsewhere.
Disadvantages of a variable home loan
The biggest disadvantage of a variable loan is that when rates increase, so do your repayments. Fluctuations in the interest rate can make it difficult to budget and if rates rise sharply you may struggle to make your repayments.
Split loans—an alternative solution
As the name suggests, your mortgage is split into 2 components: a fixed rate loan and a variable one. If you’re struggling to decide between a fixed and variable loan, a split loan might be the perfect solution. Split loans give you some of the flexibility of a variable loan while still managing the risk of interest fluctuations. Depending on your lender, how you proportion the split is up to you. The fixed component allows you to lock your mortgage in at a specific rate for a set term. The variable portion of your split loan will be set to the variable interest rate set by your lender.
If you’d like some more information on home loans or you’d like to discuss your options, call one of our lending specialists on 134afm or complete our contact form and one of our helpful team members will get back to you.