Should I fix or should I vary? That’s often the question for many a home loan applicant. Knowing the difference – and the unique pros and cons – of each type of interest rate is critical to making the right decision when taking out a mortgage.
What is a fixed rate?
A fixed rate loan is the exact opposite – rather than moving up and down as the lender sees fit, the rate is set at a specific level for a certain period of time – anywhere between one and five years. During these years, no matter what happens with wider economic conditions, the rate will stay exactly the same.
What is a variable home loan?
Variable home loans are products where the interest rate fluctuates based on the movement of the official cash rate (OCR). Because the OCR has been at rock bottom levels lately, variable rates have similarly fallen. However, if the OCR were to go up, so, likely, would the variable interest rate.
So, which one is better?
It’s not as simple as one being better than the other. Each has its advantages. Because a fixed rate stays the same, you get a greater stability in your monthly repayments, making budgeting easier. As well as this, if rates have fallen significantly, fixing your rate could be a good idea – this way, you protect yourself from any future rate increases while making the most of current lows.
Of course, you have to time it well. Some people fix only to see interest rates fall further and further in subsequent months, locking them into a higher rate. It’s also worth noting that, sometimes, a lender may charge you a fee to make extra repayments on a fixed rate.
Do I have to choose?
Not necessarily – there is such a thing as a split home loan which allows you utilise both, though that’s a whole topic on its own.