Fixed vs Variable Home Loans
When it comes to choosing a home loan, one of the biggest decisions you'll make is whether to go fixed, variable or split interest rate.
Each option has its own pros and cons, and the right choice depends on your financial goals, lifestyle and risk tolerance.
What is a Variable Rate?
A Variable Rate home loan means your interest rate can go up or down over time. These changes are influenced by the Reserve Bank of Australia's (RBA) cash rate, market conditions and your lender's policies.
Pros of Variable Rate Loans:
- Flexible repayments: Make extra repayments, without penalty, helping you pay off your loan faster.
- Offset and redraw features: Many variable loans come with offset accounts or redraw facilities, which can reduce the interest you pay, while giving you access to extra funds.
- Easier to refinance: Switching lenders or loan products is generally simpler and cheaper, with a variable rate.
- Benefits from rate cuts: If interest rates drop, so do your repayments.
Cons of Variable Rate Loans:
- Rates can rise: If interest rates increase, so will your repayments
- Less predictability: Your monthly repayments can fluctuate, making budgeting a bit trickier.
What is a Fixed Rate?
A Fixed Rate home loan locks in your interest rate for a set period, usually between 1 to 5 years. This means your repayments stay the same, no matter what happens in the market.
Pros of Fixed Rate Loans:
- Rate stability: Your repayments won't change during the fixed term, making it easier to budget.
- Protection from rate hikes: If interest rates rise, your rate stays the same.
- Peace of mind: You'll know exactly what you're paying each month.
Cons of Fixed Rate Loans:
- Limited flexibility: Extra repayments may be restricted or capped.
- Break costs: Exiting your loan early or refinancing during the fixed term can trigger significant fees.
- No benefit from rate cuts: If rates drop, your repayments stay the same.
What is a Split Loan?
A Split Loan gives you the best of both worlds. You divide your loan into two parts, one with a fixed rate and the other with a variable rate. For example: you might fix 60% of your loan and leave 40% variable.
Pros of Split Loans:
- Rate security & flexibility: Enjoy the stability of fixed repayments on one portion, while taking advantage of variable features on the other.
- Extra repayment options: You can make unlimited repayments on the variable portion.
- Offset and redraw access: Depending on your lender, you may still benefit from these features on the variable side.
Cons of Split Loans:
- More complex: Managing two loan types can be a bit more involved.
- Not always available: Not all lenders offer split loan options.
Key Terms You Should Know
Break Cost
A fee charged if you exit s fixed rate loan early.
Offset Account
A transaction account linked to your loan, that reduces the interest you pay.
Rate Lock
A fee that lets you secure a fixed rate, before settlement.
Redraw Facility
Lets you access extra repayments you've made on your loan.
Ready to Chat About Your Home Loan Options?
Choosing between fixed, variable and split home loan comes down to your personal circumstances. If you value flexibility and can handle some risk, a variable rate might suit you. If you prefer certainty and want to lock in your budget, a fixed rate could be the way to go. And if you want a bit of both? A spilt loan might be your perfect match.
Still unsure? At RLA Finance, we're here to help you navigate your options and find the loan the fits your life, not just the numbers.
Contact us today for a personalised, stress-free experience!