It's important to understand the differences between fixed and variable rates. This guide will help you gain some insights into the pros and cons of each type of loan so you can work out what is right for you.
Is a fixed rate home loan right for me?
A fixed rate home loan simply means that you 'fix' the interest rate at whatever the rate is at the time of your application for a set period (usually one to five years).
With a fixed rate, you have certainty with repayments during the fixed rate period you've selected. You'll have peace of mind that you won't face any surprises should interest rates rise during your fixed rate term.
Apart from not being able to take advantage of a rate decrease, you might not have access to extra features like redraw or be able to make extra repayments to help pay your loan faster (or your lender might limit the amount). That means your loan term could be longer so you'd pay more interest overall. If you want certainty in your loan repayments and don't need extra loan features, a fixed rate loan might suit your needs.
Is a variable rate home loan right for me?
A variable rate loan is a loan with interest rates that are subject to change throughout the term.
With this type of loan, you'll get more features like redraw and offset accounts. You'll also benefit if interest rates drop -your repayments will go down accordingly, saving money on the life of your loan. With a variable loan it's usually easier to refinance switch your loan later to one with a more competitive rate while avoiding paying break fees.
Yes, you get some great features but there are downsides too. Should interest rates rise, you might find it more challenging to make repayments. Lenders are required to apply a 'stress test' to check if their customers could manage repayments if interest rates rise. Under the new standards, they can set their own buffer as long as they ensure customers can afford repayments at interest rates at least 2.5 per cent higher than their current arrangement.
While this recent change may make it easier for you to get a mortgage, it's still important to feel confident that the mortgage you commit to now will still be affordable in the future.
If you want to make extra repayments or have the freedom to refinance switch your loan for a better rate should your personal circumstances change in the future, a variable rate loan might suit you.
What about a split loan?
With a split loan, you get the best of both loan types. If you want the flexibility to make extra repayments and limit the risk of any interest rate changes, a split loan might suit you.