How to Choose between Fixed, Variable or Split Rate Home Loan
Today’s low home loan rates and rising property values have encouraged many to purchase their next home. Whether you're a first-time homebuyer, planning a move, or looking to refinance your current home loan to save money, it's essential to understand the three main types of home loans available to you.
Fixed rate home loans
A fixed-rate home loan locks in your interest rate for a set term, offering stability and predictability in your repayments. This can be reassuring, especially during periods of market volatility, as your payments remain unchanged even if the cash rate increases. With a fixed rate, you’ll know exactly how much you owe each month, which simplifies budgeting and provides a sense of financial security.
Typically, fixed-rate terms range from 1 to 5 years and automatically revert to a variable rate once the fixed period ends. While you can choose to lock in another fixed-rate period, the new rate will likely be different.
One key drawback of fixed-rate loans is the inability to make extra repayments. If you receive a bonus or pay rise, you’ll be unable to pay off your loan faster without facing potential penalties. Some lenders do allow limited extra repayments, but these are usually capped annually.
Additionally, refinancing a fixed-rate loan can be tricky before the end of the term. If you try to refinance, make extra repayments, or pay off the loan early, you may incur break costs. Another downside is that you won’t benefit if interest rates drop significantly; to take advantage of lower rates, you'd need to go through the hassle and cost of refinancing.
Benefits of Fixed-Rate Home Loans:
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Protection against interest rate rises
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Easier budgeting and financial planning
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Consistency and stability in repayments
Drawbacks of Fixed-Rate Home Loans:
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Limited access to loan features like offset accounts
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Unable to make unlimited extra repayments
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Possible break costs if you refinance or overpay
Confused about navigating the world of modern home loans? At Avenstone we make it easy to understand your options and find the best fit for your needs.
Variable home loans
A variable-rate home loan has an interest rate that can change at any time, which directly impacts your monthly repayment amount. If your lender raises the interest rate, your repayments will increase, and if they lower it, your repayments will decrease.
The key benefit of variable rate loans is flexibility. You can make unlimited extra repayments, add features like an offset account or redraw facility, and refinance with relative ease. These features can help you pay off your loan faster and save thousands in interest over time.
However, the biggest downside is interest rate fluctuations, which can make your repayments unpredictable. These fluctuations are influenced by the cash rate, set by the Reserve Bank of Australia (RBA), but lenders can also change rates independently due to factors like rising costs or competition.
Benefits of Variable Rate Home Loans:
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Lower repayments when interest rates drop
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Ability to make extra repayments
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Option to add loan features like offset accounts or redraw facilities
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No break fees for refinancing
Drawbacks of Variable Rate Home Loans:
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Fluctuating interest rates create repayment uncertainty
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Potential for mortgage stress due to changing rates
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Lenders can change rates independent of the RBA cash rate decisions
In summary, while variable rate loans offer flexibility and the chance to save on interest, they come with the risk of payment fluctuations and the uncertainty of future rate changes.
What are the benefits of a split rate home loan?
A split-rate home loan combines both a fixed-rate and a variable-rate loan, allowing you to enjoy the benefits of both. With this setup, part of your loan remains fixed, offering stability and protection against rate hikes, while the other part is variable, giving you the flexibility to benefit from rate drops.
The main drawback is that you may still be limited in making extra repayments on the fixed portion of your loan, as it can incur penalties for early repayments. However, the variable portion allows you to make additional payments, potentially reducing the overall interest paid.
Choosing between a fixed, variable, or split loan depends on your personal circumstances. Are you seeking stability, or would you prefer the flexibility to make additional repayments when your income increases?
To discuss your options, contact the Home Loan Specialists at Avenstone. We can help you find a loan that suits your needs, making the refinancing process easier.
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in Residential & Commercial Banking