Fixed vs Variable

Whether you’re looking for your first home, or you have an investment property, the fixed versus variable home loan debate makes it hard to choose.

With interest rates at an all time low, and price being influenced by more than just the RBA cash rate, it’s anyone’s guess as to when rates will move and by how much. As a result, borrowers may be feeling uncertain as to which type of loan is best for them in the long and short run – fixed or variable. However, the home loan market isn’t just a game of chance. By considering your individual circumstances, the pros and cons of available options and utilising tools such as ahome loan comparison tool, you are more likely to be able to find a solution that works best for you.
Why choose a fixed home loan?
A fixed home loan allows you to lock in an interest rate for a set period, for example, three years. Fixed home loans are often thought to be restrictive, but don’t be fooled in to thinking this. Unlike most, Community First’s fixed home loans come with the ability to redraw, make extra repayments and a 100% offset account – which make their features a stand out in the market.
This can be a competitive choice for mortgage holders for a couple of reasons:
  1. It allows for greater stability

    A lot of borrowers look to fixed home loans as a source of stability. By locking in your mortgage rate, you allow yourself protection from future interest rate increases for the duration of the fixed period. Fixed rates allow borrowers the confidence of knowing if they can afford repayments now, then they can still afford to make them for the rest of the fixed period (if their circumstances stay the same), whether rates rise or drop.
Why choose a variable home loan?
A variable home loan is a fluctuating approach to mortgage repayments, in which your interest rate will move with changes to interest rates set by your lender.There are a few key reasons why borrowers may consider variable home loans:
  1. Enjoy those market lows

    One of the advantages variable home loans have over fixed is that when rates drop, your interest rate drops too, helping you to save money on your repayments. The lender will consider a range of factors to determine your variable interest rate. For example, the RBA cash rate, the ratio of fixed versus variable loans they currently have, regulatory requirements, internal financial measures, market pressures and competitor pricing, to name a few. For example, according to Rate City, choosing a variable home loan rate in September 1991 (the end of the recession in Australia) would have saved borrowers tens of thousands in interest repayments compared to those who fixed, as the RBA cash rate fell 4.75 percentage points over the next three years.

  2. Flexibility and features

    Variable home loans are typically known to have more flexibility and features for borrowers. Extra payments are allowed at no extra cost (often unlimited), helping you to pay back your debt faster. You can also enjoy additional loan features such as redraw facilities and offset accounts, however these are also available on Community First’s fixed home loans, which is rare in the market. It can also be easier and cheaper for borrowers to refinance their variable home loan with another lender as they don’t need to pay a penalty to break the fixed period.
What else should borrowers consider?
First and foremost, you need to consider your personal circumstances when choosing a home loan product. Its not just about the interest rate – features can play an important role in determining the suitability of the loan. For example, if you make extra repayments on the loan, can you access them later if you decided to take time off work to start a family or if you were in between jobs? Some Australians “panic fix” when interest rates are at their highest. This overly cautious behaviour means that when interest rates do eventually drop, borrowers are locked in to paying more.
If you still can’t decide on which loan is right for you, you could consider a split home loan. As the name implies, this would allow you to have half your loan in a variable account, riding the highs and lows of the interest rates, and the other half in a fixed account.
If you’re finding it difficult making sense of all the interest rates, there is a way you can compare apples with apples. By viewing the home loan key fact sheet for any given loan you are considering, it will tell you exactly how much interest you will repay over the life of the loan, and for every dollar you borrow, how much you have to pay back.
Credit eligibility criteria, terms and conditions, fees and charges apply.

Last updated: 02 January 2018

The information contained in this article is only correct at the point of time of publication. It is general information and has been prepared without taking into account your personal circumstances, objectives or needs. Please consider if this information is right for you before making a decision to acquire any product.

Community First Credit Union LimitedABN 80 087 649 938 | AFSL and Australian credit licence 231204 | BSB 512-170