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Fixed vs. Variable rates – what does it all mean?

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If you're in the market for a home loan, one of the biggest decisions you will face is whether you should take out a fixed or variable rate loan. With interest rates at an all time low, we examine both sides of the fixed vs. variable home loan argument to help you decide.

What is a fixed home loan?

With a fixed rate home loan, the rate of interest charged does not change for the duration of the agreed term, commonly between one to five years. In such an arrangement, you effectively ‘lock in’ your loan repayments for a certain period of time. At the end of this agreed fixed interest period, the loan will usually revert to a prevailing standard variable interest rate.

If you’re concerned that interest rates may rise in the next few years, a fixed rate home loan will provide greater certainty. It means that you can confidently budget for other expenses, knowing exactly what your future repayments will be. On the other hand, if you think that interest rates have further to fall, a fixed rate may mean that you miss out on any potential savings if rates do drop further.

When considering a fixed interest loan, borrowers may want to look for a loan that allows some flexibility – such as the ability to make additional repayments. However, it’s also a good idea to investigate whether your lender will charge you a fee if you do decide to make repayments above your agreed minimum. Borrowers might also like to take into account potential changes on the horizon that could affect their financial situation. If you need to break a fixed rate loan, you should to be aware of the costs involved.

Unfortunately there is no crystal ball that will accurately predict either your future, or the economic factors that affect the movement of interest rates. But if you would prefer some degree of certainty, a fixed rate loan is certainly a reasonable option to consider.

What is a variable home loan?

A variable rate home loan is where the interest rate charged on that loan can change over time, due to market conditions or at the discretion of the lender. If interest rates go up, your repayments will also follow suit. Conversely, if your lender decides to cut your rate, you will enjoy the benefits of a reduced minimum repayment amount.

For some people, this exposure to market fluctuations could make planning and budgeting difficult. As interest rates rise so does your home loan repayment. This might mean you have less money to allocate to other expenses.

However, it’s not all bad news for budgets. A variable home loan generally offers more flexibility than a conventional fixed rate home loan. Gateway, for instance, offers unlimited additional repayments, redraw facilities and 100% loan offset accounts. These features enable you to minimise interest costs and potentially shorten the term of your loan, whilst providing ready access to available funds when needed.

What if I can’t decide?

If you are unsure whether to go with a variable or fixed rate loan, then a split loan is something to consider. With a split home loan, you can structure your loan to effectively hedge your bets on future interest rate movements. This means you can secure a portion of your loan at a fixed rate, whilst keeping the remaining portion variable. You even get to decide the number of splits, the term of each fixed rate split, and what percentage you would like to set as fixed or variable.

Splitting your loan may reduce the impact of interest rate fluctuations and help to provide some certainty over your regular repayments.

Ultimately, the decision is up to you. But make sure you do your research to work out what home loan works with both your lifestyle and your budget. After all, a little effort now, can make a big difference over the course of your loan.

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