Interest rates, interest rates, interest rates. As we continue into 2022 and the interest rates in Australia continue to climb, we’ve been getting the same question a lot from our clients lately.
What are the key differences between fixed vs variable rate mortgages, and which is better for me?
The Australian variable rates are currently lower than what is available on most fixed rate loans. Despite this, it may seem like fixed rate mortgages are the better option in this financial climate to ensure you’re not paying extreme amounts in interest. There are many factors to consider when deciding between a fixed and variable rate loan. Factors influencing this decision will likely include your personal priorities – around paying off your loan, refinancing, and making additional payments – as well as the amount of your loan, your income, whether you have lender’s mortgage insurance, and more.
Ultimately, every client has different requirements and considerations. This decision will come down to individual circumstances – and we’re here to help you make that decision.
What are fixed interest rate home loans?
Fixed rate home loans guarantee you, the borrower, will be paying an agreed-upon amount of interest for a set length of time. For example, a fixed rate home loan may guarantee you will pay 2% interest for 5 years of your loan. Most fixed rate loans guarantee a fixed rate from between one to five years.
If the lender believes the interest rate is likely to rise over the coming years, fixed rates on offer may be higher than variable rates available. If the lender believes the interest rate is likely to fall, fixed rates will likely be lower than variable rates on offer. These are still determined by the fixed rate market and how the bank is funding fixed rate loans – the bank will sometimes get money through an external funder who sets the fixed rate boundaries.
Homebuyers who take out fixed rate loans may do so for a number of reasons. Firstly, they can take this loan confidently knowing they will be able to make the agreed upon repayments for however long the fixed term is. This gives them more stability and makes their mortgage more predictable. They may also anticipate that the variable interest rate will continue to rise and want to lock in a lower rate.
The key downside of fixed rate interest loans is the lack of flexibility. They do not allow borrowers to access offset and redraw benefits (in most instances). Borrowers are also generally penalised for making additional payments, breaking their mortgage, or early payout of the loan.
Once the fixed term of your mortgage has ended, you can choose to fix the loan again for another period of time, or roll onto the current rate available.
What are variable rate home loans?
Variable rate home loans vary, as the name suggests, as the interest rate across the country fluctuates. Variable rates reflect the current financial climate and are generally based on the Reserve Bank’s official cash rate. Because of this, your loan repayments will vary and may go up and down over the lifetime of the loan.
Variable rates also come with additional benefits that are not generally available, such as offset and redraw facilities and the ability to make additional payments. This flexibility is generally considered the key benefit to variable rate loans.
Variable rate loans also ensure you won’t be stuck paying a higher fixed rate in the event of an interest rate crash, such as in 2020 when the interest rates sharply fell.
The key downside to variable rate loans is the insecurity. There is a chance that you loan will rise sharply, and your repayments may become impractical on a strict budget. So, if you’re thinking of getting a variable rate loan you should ensure you have wiggle room in your budget for any ups and downs!
Which interest rate type is right for you?
Ultimately, determining which interest rate is right for you will depend on your finances, the total amount you are borrowing, and your risk appetite. If you believe you will be able to make additional repayments on your mortgage above the required repayments, or think the interest rates may fall significantly again, then a variable rate loan could reduce your mortgage timeframe and decrease your total interest paid. Plus, benefits such as offset and redraw can provide useful in managing your loan effectively.
However, if you need to stick to a specific budget and believe the rising interest rates will continue to climb, then a fixed rate may provide you with the security you require and allow you to make financial decisions confidently.
Talk to our team.
Not sure which option is right for you? Want to talk more about the pros and cons of fixed vs. variable rate home loans? Talk to the Arch Brokerage team.
Knowing exactly which kind of loan is right for you is essential in securing a home loan (and dream home) that will leave you happy AND financially safe. Plus, as mortgage brokers come with no additional cost to you, there’s no reason not to find a broker who can handle the logistics of your loan while you focus on finding the right home.
We’re here to help! Talk to us today for a no-obligation chat and see if we’re a good fit.