Fixed vs Variable | Which To Choose

Fixed vs Variable – Which To Choose

You’ve found your dream home! Now, the next big step is deciding between a fixed or variable home loan. This choice can significantly impact your financial future, so let’s break it down smoothly.

Homeowners with fixed-rate mortgages have recently faced the “mortgage cliff.” When their fixed-rate period ended, they had to refinance at higher interest rates, leading to significantly higher monthly payments. On the other hand, those with variable-rate mortgages experienced rising monthly payments due to rapid interest rate increases, making budgeting more challenging.

Both fixed and variable options can either save or cost you money, depending on market conditions.

Understanding Mortgage Rate Options

Fixed rate and variable rate mortgages come with unique characteristics, benefits, and potential drawbacks. Understanding these fundamental differences is a good place to start.

Fixed Rate vs. Variable Rate Loans

How To Choose Between Fixed And Variable Rates

Choosing the right mortgage type is crucial for your financial well-being. Here’s a detailed breakdown of the factors to consider:

Risk Tolerance And Financial Stability

• Fixed-Rate Loans: Perfect for individuals who need predictable monthly payments to manage their budget effectively and prefer stability and predictability. For example, a young family with tight financial margins might prefer a fixed-rate mortgage to ensure their housing costs remain stable and predictable, allowing them to plan for other expenses like childcare and education without worrying about fluctuating mortgage payments. Similarly, a retiree on a fixed income might opt for a fixed-rate loan to avoid financial stress and ensure their income covers all their needs without unexpected changes.
• Variable-Rate Loans: Suitable for those who can handle variations in their monthly payments, want to save money initially and are comfortable with fluctuating payments while willing to take on risk for potential savings. For instance, a young professional might choose a variable-rate loan to benefit from lower initial rates and reduce their monthly outgoings during the early years of homeownership, which could be useful for paying off other debts or saving for future investments. An investor with multiple properties might prefer a variable-rate loan, betting on interest rates staying low and thus benefiting from reduced payments while being prepared for potential increases.

Financial Goals And Planning

• Fixed-Rate Loans: Favourable for long-term planners who value financial security and tax benefits. For example, a couple planning to stay in their home for many years might appreciate the predictability of fixed payments and the potential tax deductions on their mortgage interest, aiding in long-term financial planning and security. These loans are also preferable for those with stable incomes or foreseeable major expenses. If you anticipate big life changes like starting a family, the stability of a fixed-rate loan can provide peace of mind.
• Variable-Rate Loans: Preferred by those who appreciate financial management flexibility and potential early-term savings. A small business owner might choose a variable-rate loan to benefit from features like redraws and offset accounts, which can be very helpful in managing business cashflow and taking advantage of any interest rate drops. These loans are suitable for those with a more adaptable financial outlook. If you expect your income to increase or foresee other changes, a variable rate can offer cost savings and flexibility.

Loan Features And Terms

• Fixed-Rate Loans: These often include partial offset accounts and limited redraw facilities but may impose break costs for early repayment. Understanding these features and terms is crucial. For instance, a first-time homebuyer should meticulously review their loan agreement to be aware of any penalties for early repayment and the specifics of partial offset and redraw facilities.
• Variable-Rate Loans: They offer greater flexibility with features like redraws and offset accounts and typically have minimal penalties for early exit. This flexibility benefits those who might want to refinance or change their loan structure in response to shifting financial circumstances or better market conditions.

Economic Conditions

• Fixed-Rate Loans: They are beneficial in a rising interest rate environment because they allow you to lock in a lower rate. If you expect interest rates to rise, a fixed-rate loan can protect you from future rate hikes, providing financial stability. Additionally, with fixed rates, your payments stay constant but, in effect, decreases over time relative to inflation. For longer-term loans, this can provide substantial savings if inflation remains elevated.
• Variable-Rate Loans: Advantageous in a declining interest-rate environment because they allow you to capitalise on lower payments. If interest rates are expected to decrease, a variable-rate loan could save you money on interest payments over time. However, lenders can adjust pricing along with market rates to keep pace with inflation, which can affect your monthly payments.

Refinancing Prospects

• Fixed-Rate Loans: Can pose challenges for those considering refinancing or moving before the loan term ends due to potential costly break fees imposed by lenders to compensate for lost interest income. These break fees can make refinancing less appealing. Also, fixed-rate loans usually offer fewer features. However, some fixed-rate loans do offer features like partial offset accounts or redraw facilities, or they may allow borrowers to make extra repayments up to a certain limit without substantial penalties. Even so, the inflexibility of fixed-rate loans generally makes them better suited for borrowers who plan to stick with their loan for the full term and do not anticipate needing to refinance or move.
• Variable-Rate Loans: Offer greater flexibility for refinancing or switching loans, typically imposing minimal penalties for early repayment. This makes it easier and more cost-effective to adjust your loan terms if your financial situation changes. This flexibility is particularly advantageous for individuals who foresee changes in their financial circumstances, such as an increase in income, the need to move to a new home, or a desire to take advantage of lower interest rates. The adaptability of variable-rate loans makes them attractive for those who prioritise financial agility and the ability to respond to market changes or personal financial developments.

Hybrid Approach: Splitting Your Loan

Can’t decide between fixed and variable? Consider a split-rate loan. This unique loan structure allows you to divide your loan amount into fixed- and variable-rate portions. You can customise the split ratio to fit your needs, like a 50/50 split or a 60/40 fixed-to-variable ratio. This way, you get the predictability of a fixed rate for a part of your loan while still enjoying the flexibility and potential savings of a variable rate on the rest.

Some lenders allow you to adjust the split throughout your loan term. This means you can seize opportunities to lock in favourable fixed rates if interest rates drop. Imagine lowering your interest costs by converting a portion of your variable-rate loan to a fixed rate!

Connect With Us Today!

We’re here to help you every step of the way. Our team of expert mortgage brokers will guide you in making the best decision for your financial goals and comfort level. We don’t just explain rates, we take the time to understand your unique situation – your income stability, long-term plans, and overall financial picture. This way, we can match you with the perfect mortgage.

Call us on 1300 889 743 or complete our free online assessment form today!