Fixed vs Variable Loans

The question of “do I or don’t I” fix my home loan is coming up more and more as we wait with baited breath to see what will happen with home loan interest rates. The question seemingly on most people’s lips is not will interest rates go up, but when, and by how much.

Unfortunately no one can answer this with any degree of certainty. This naturally leads many to contemplate purchasing with a fixed rate product, or for those who already have a home loan looking to move into a fixed rate.

The benefits to a fixed rate product are pretty obvious. You do not have to worry about the interest rates rising for the term that you choose to fix your loan in for. The periods available range from 1 to 5 years generally with a few lenders offering longer periods up to 10 years.

The disadvantages to having a fixed rate loan are of course that if interest rates do not go up, or if they go down, you do not benefit and can even find yourself paying higher than the market interest rate.

More importantly one should note that if you take a fixed rate, most lenders will not allow much in the way of extra repayments on your loan without penalty and will charge you extra exit fees should you choose to exit the fixed term is completed. The exact amount of these fees will depend on the loan amount, and how close to the end of the fixed rate period it is. This can run into the thousands of dollars.

The benefits of a variable rate loan product lies in the flexibility, that you can make extra repayments at any time and that generally, as long as you do not pay the loan off entirely within the first few years, there are no extra discharge penalties applicable.

If however you look at the variable type product, you are taking some risk on board regarding interest rate increases. There is always the chance that the monthly amounts could increase to an uncomfortable degree.

So which way do you turn? Part of this depends on your own circumstances and personal feelings regarding the issues at hand. One solution is to combine the two options and look at a split product. Have one portion of the loan fixed and the other as a variable rate.

As an example, imagine you are looking to borrow $400,000 to purchase a new property. You can have any split you like, but to keep it easy we will use a 50/50 split.

You can have $200,000 as a fixed rate product so you know the repayments on that loan will remain the same for the period you request. The other half of the loan would be on a variable rate product, giving you the ability to make extra repayments, and in fact pay off the $200,000 variable portion of the loan with no penalty to yourself. This combines the flexibility of the variable rate with the security of the fixed rate.

If you would like to discuss the options best suited to your needs and circumstances please do not hesitate to contact one of our brokers on 02 9939 8823.