Difference Between Fixed & Variable Loan

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Are you looking to purchase or refinance your home and not sure which option is best for you?

The Australian property market is a hive of activity, with both local and international buyers looking to stake their claim. For Australian expats and foreign buyers, working your way through the home loan market can be daunting, particularly when it comes to choosing between a fixed or variable home loan.

When obtaining finance, we tailor your home loan to your needs, so you can rest assured you have the best loan that works for you. With that said, it is important for you to know the types of interest rates available and understand the difference between the two.

This comprehensive guide will provide you with the necessary information to make an informed decision when applying for a home loan in Australia.

What is the Difference Between Fixed & Variable Loan rates?

When obtaining a mortgage, two options stand out: fixed-rate home loans and variable-rate home loans. But how do you know which one is right for you?

Fixed-rate home loans lock in your interest rate for a specified period, typically between one to five years. This provides certainty of repayments, shielding you from potential interest rate rises. On the contrary, variable home loans have interest rates that fluctuate in line with the market, potentially offering more flexibility and features.

The Allure of Fixed-Rate Home Loans

Fixed-rate home loans are attractive for their stability. Your repayment amounts are set, providing peace of mind that even if the market fluctuates, your repayments won’t. This is particularly beneficial if you’re budgeting for the future or if you anticipate interest rates will rise.

Why are fixed rates sometimes higher than variable? It’s all about risk management. Banks are taking a gamble by locking in your rate, and the slightly higher rate is their insurance policy.

The Flexibility of Variable Home Loans

Variable home loans offer flexibility, allowing you to make extra repayments, redraw facilities, and offset accounts. As the interest rates fluctuate with the market, there’s potential to benefit if rates fall. However, this also means that if rates rise, so will your repayments.

Which one should I go for? Fixed or variable interest rate?

Now that you know what fixed interest rates and variable interest rates are, it is time to decide on one that would work for you. Whilst variable interest rates have maintained popularity in recent years with record low interest rates, fixed rates have also been popular with people wanting to “lock in” the low rates in case rates start to increase again.

We can’t say for sure which option is better – it is all about what you need and what works best for you. We often suggest for our clients to have a mix of both to enjoy the knowledge they have a portion of their loan on a set rate for a period of time, whilst also being able to enjoy benefits that are only available with a variable rate loan.

Here are some pros and cons of the two types of rates mentioned:

Fixed rate home loans

Pros Cons
Predictable monthly payments
Interest rates may be higher than variable rate loans
Less risk of interest rate fluctuations
May not be as flexible as variable rate loans
Can be a good option for people who are on a fixed income or who have a budget that is sensitive to changes in interest rates
May incur early repayment penalties if you need to pay off the loan early

Variable rate home loans

Pros Cons
Potential for lower interest rates
Monthly payments can increase if interest rates rise
More flexible than fixed rate loans
More risky than fixed rate loans
May not incur early repayment penalties
May not be a good option for people who are on a fixed income or who have a budget that is sensitive to changes in interest rates

Ultimately, the best way to decide which type of home loan is right for you is to speak to a financial advisor. They can help you assess your individual circumstances and financial situation and recommend the best type of home loan for you.

Here are some additional things to consider when choosing between a fixed rate and variable rate home loan:

  • Your risk tolerance: If you are comfortable with the risk of your monthly payments increasing, then a variable rate home loan may be a good option for you. However, if you are more risk-averse, then a fixed rate home loan may be a better choice.
  • Your financial situation: If you have a stable income and can afford to make higher monthly payments if interest rates rise, then a variable rate home loan may be a good option for you. However, if your income is not as stable or if you cannot afford to make higher monthly payments, then a fixed rate home loan may be a better choice.
  • Your plans for the future: If you plan to sell your home in the near future, then a variable rate home loan may be a good option for you. This is because you will not be locked into a fixed rate for a long period of time. However, if you plan to stay in your home for the long term, then a fixed rate home loan may be a better choice.

How Australian Expats & Foreign Buyers Can Choose

For Australian expats and foreign buyers, the choice between fixed and variable home loans can be influenced by your future plans, currency risks, and Australian credit policies. It’s always recommended to seek advice from a mortgage broker who understands both the Australian market and international considerations.

How Currency Fluctuations Can Affect Your Decision

Currency fluctuations can play a significant role in your decision, particularly for foreign buyers or Australian expats earning income in a different currency. A fixed-rate home loan can provide protection against currency fluctuations as your repayments remain the same.

The Impact of COVID-19 on Home Loan Decisions

The global pandemic has affected interest rates worldwide, with Australia experiencing record-low rates. As the economy recovers, it’s anticipated that interest rates will rise again. This may impact your decision on whether to choose a fixed or variable home loan.

Factors To Consider When Deciding Between Fixed Vs Variable Home Loan

Before making a decision, you should consider the following factors:

  • Financial Stability: If you require the certainty of knowing exactly what your repayments will be, a fixed-rate mortgage might be the best option.
  • Flexibility: If you want the ability to make additional repayments without penalty or use features like offset accounts, a variable-rate home loan would be more appropriate.
  • Market conditions: Keep an eye on the economic climate and potential interest rate movements. If rates are expected to rise significantly, locking in a fixed rate could save you money.
  • Risk Tolerance: If you are comfortable with the risk of fluctuating rates and potentially higher repayments, a variable rate could be advantageous.
  • Loan Features: Some loans offer features like redraw facilities or offset accounts that might only be available with variable home loans.

Final Thoughts

The decision between a fixed or variable home loan is a significant one that requires careful consideration of your personal situation and market conditions. By staying informed and seeking professional advice, you can navigate the home loan process with confidence.

Whether you’re an Australian expat or a foreign buyer, understanding the intricacies of the Australian home loan market can be key to securing the best deal possible. Always remember, the right home loan for you is the one that best aligns with your financial circumstances, goals, and risk tolerance.

Remember, the Australian home loan market can change quickly. So, whether you’re leaning towards a fixed-rate or variable-rate home loan, it’s essential to keep an eye on the market, stay informed, and be ready to reassess your decision as necessary.

Don't Get Lost In The Special Features

A home loan should be simple – you borrow money from a lender and repay the amount with interest over time. Some financial institutions might try to sell you on special features but don’t get caught up in thinking you need all of these, because ultimately it might not be of any use to you, and can sometimes end up costing you more.

Choose the rate that suits you best

Fixed-rate or variable rate – what you choose is up to you. It is all about understanding your options and selecting what works best for your individual situation.

Speak with a specialist mortgage broker at Odin Mortgage today so we can ensure you are making the right choice. 

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.

Frequently asked questions

Yes, although there might be break costs associated with switching from a fixed to a variable home loan.

No, fixed interest rates remain the same for the duration of the fixed term.

Fixed interest rates remain the same for the entire term of the loan, while variable rates fluctuate with market conditions.

A fixed-rate home loan has an interest rate that remains the same for a specified period. This can provide certainty in terms of monthly repayments.

A variable home loan has an interest rate that can change (increase or decrease) over the life of the loan, depending on market conditions.

Fixed-rate home loans offer certainty of repayments, protection against rate rises, and ease of budgeting as your repayment amounts don’t change during the fixed period.

Variable home loans can offer more flexibility than fixed home loans, such as the ability to make extra repayments, and use features like offset accounts and redraw facilities. If rates fall, you could end up paying less.

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