Fixed or variable? What loan suits the needs of you and your budget best?
The choice of loans are endless in the current market, but the main types we see are the choices between, and the biggest decision you’ll need to make, is that of a variable or fixed rate of interest, and the suitability contains many variables which are up to each individual, due to the uniqueness of each individuals situation.
Here are some facts on the two, which may come in handy when making your decision.
Fixed rate advantages.
Fixed rates offer certainty to borrowers - for a period of time which is organised at the commencement of the fixed period, be that when the loan is funded, or while your loan is in place if you wish to ‘switch’ to a fixed rate. Most lenders offer between one to five years, but others can offer up to fifteen years on a fixed rate. Fixing for a period of time allows you to budget and know what your repayments will be for a period of time. In most cases, at the end of the fixed period, the loan will automatically roll over to the applicable variable rate, but you will likely be given fixed options ahead of time (most lenders are one to three months ahead they’ll notify you)
Summary points
Protect yourself against rising rates, while being able to budget and plan
Know what your repayments will be for the foreseeable future
Points to consider about fixing your loan
Fixed rate home loans give certainty, not flexibility like variable rate loans. This is an important point to keep in mind when considering fixing.
Summary points
Most offer no redraw or offset, meaning your loan is essentially ‘set and forget’ for the fixed term
Penalties associated with early payout, either partial or full.
You won’t benefit if rates drop
Variable rate advantages
If you need flexibility in your home loan, a variable rate home loan may be better suited.
Variable rate loans will go up and down throughout the term of the loan in line with market conditions. These market conditions and factors are varied, but include in part; the official cash rate set by the Reserve Bank of Australia (RBA), lending costs for lenders, appetite for certain property types, and loan to value rations (LVRs)
Summary points
Most lenders offer no limit on your extra repayments on a variable rate loan.
Depending on the product, most also include the ability to redraw the extra repayments you make above and beyond your minimum repayments.
Certain lenders offer products called ‘offset’ meaning funds held in this account will reduce the amount of interest charged on your loan, assisting you in paying it off earlier. For example, if you hold an eligible offset account with $100,000 in it, against a loan of $500,000, you should be only charged a rate of interest on the difference, being $400,000.
Points to consider about your variable loan
A variable home loan can help you in terms of the flexibility it offers being able to pay off quicker if you’re able to, and ability to take advantage of falling interest rates while paying the same repayments when they fall. But if rates increase, so will your repayments if you are only paying the minimum.
Your repayments may increase if rates increase
It can be harder to budget for the future, if you need absolute certainty around your budget
Splitting
Many lenders also offer the ability to split your loan, into both fixed and variable. This option can suit if you need a bit of both in your life.
The best thing to do around any of these options, is to book a time to discuss your situation with Crown Property Finance, as each persons financial situation is different and unique, so each person and household needs their own tailored solution
