Deciding to get a 2018 variable vs. fixed home loan can be confusing. There are lots of different loan types with various terms and conditions. But, when choosing a loan – no matter the type – one of the biggest questions is whether to get a variable or fixed rate loan.
Understanding the differences and benefits of each loan type can help save you money and prepare you for repayments.
So what is a variable rate loan and a fixed rate loan?
Loan Rate Types
Variable rate loans do not have a set interest rate. Instead, the interest rate fluctuates with market trends. You can expect your variable rate to change over the course of your loan. Sometimes it will go up and other times, it will go down. And with your changing interest rate, your repayments will also vary.
Fixed rate loans, on the other hand, have a set interest rate for a period of time. Usually, the set interest rate period ranges between 1, 3, and five years. This means that during your set period, your interest rate is locked in and you can expect to have the same repayments each month.
However, once the set interest rate period is over, most fixed rate loans revert to the variable rate offered by their lender at that time.
So which one is better? Variable and fixed rate loans each have their pros and cons.
Variable vs Fixed Home Loan: Pros & Cons
Variable Rate: Pros
- When choosing a variable rate loan, you often have the option to make extra repayments at no additional cost. Making extra repayments can help you save on interest by paying down your principal. Doing so can also help you pay off your loan sooner.
- Each loan type will come with its own terms and conditions, and variable rate loans typically offer more flexibility. Customers have the option to choose from a range of benefits, such as an offset account or redraw facility.
Variable Rate: Cons
- Because the interest rate fluctuates on a variable rate loan, so do the monthly repayments. As a result, it can be harder to budget and project how much your repayments will be from month to month.
- With the fluctuating rates and payment amounts, customers may run into difficulty making repayments when they experience unexpected rate hikes. While they will benefit from lower repayments when interest rates drop, they may be caught off guard when rates rise and repayments go up.
Fixed Rate: Pros
- Because the interest rate on fixed rate loans remains the same, customers already know how much their repayments will be each month. This makes it easier to budget and plan for life’s expenses.
- While customers with fixed rate loans won’t be able to take advantage of periods when the rates are low, they will also not be subjected to rate hikes. This means that they never have to worry about their payments jumping.
Fixed Rate: Cons
- As customers won’t be subjected to rate hikes, they will also not benefit from times when the rates drop. So, while customers with variable rate loans see their repayment amount drop, those who choose fixed rate loans will have to make the same repayments that they originally signed up for.
- With most fixed rate loans, customers do not have the chance to make additional repayments without an additional fee. Fixed rate loans usually have less flexible repayment terms. Extra repayments are often permitted, but only up to a certain amount or with a fee.
Going into 2018, more borrowers chose to get a variable rate loan instead of a fixed rate loan. This means that they were comfortable with the loan rate available when they signed their loan and were willing to assume the risks associated with the variable rate.
Data from the Australian Bureau of Statistics showed that the percentage of borrowers who chose fixed rate home loans dropped by 3.2% going into 2018.
But does this trend make sense given the current market? While interest rates are currently low, rates are expected to rise in the later parts of 2018. So, what does that all mean, and how does it help you decide between 2018 variable vs fixed home loans?
To take advantage of low current rates and avoid rate hikes later in the year, borrowers can consider taking out a fixed rate loan if they’re looking to borrow now.
However, before commiting to a fixed rate loan, remember the drawbacks. Fixed rate loans are less flexible than variable rate loans and may not allow unlimited extra repayments or other benefits associated with a variable rate loan.
So, before you decide, make sure you understand the terms and conditions of your loan in addition to how loan rates affect your monthly repayments.