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The Great Rate Debate
The current global market volatility and recent interest rate hikes have heightened interest in the debate leading to even more rate scrutiny.
Homebuyers are now more aware that loan finance decisions should be thoroughly explored. As a result, they are seeking the advice of home loan specialists who can help prioritise goals, examine financial circumstances, assess need for security and, ultimately, decide which side to take in the 'Great Rate Debate'.
Commonwealth Bank's Head of Retail Products, Michael Cant, takes the role of adjudicator to mediate the case between fixed and variable rates.
What is the difference between fixed and variable?
A variable rate home loan can rise and fall depending on the official cash rate and the costs of funding being experienced by mortgage providers.
Borrowers can also choose to split their home loan by choosing to have some of their loan in a fixed term and interest rate and the remainder on a variable interest rate. This option provides a balance between the certainty of repayment amounts and flexibility.
If you need to follow a carefully thought through budget to manage your cash flow and are looking for certainty in repayment amounts, a fixed rate home loan would be the preferred option. Homebuyers with a number of financial responsibilities who are working to a strict budget can feel secure knowing that their repayments will be consistent and that their interest rate is protected from further increases during the term of the loan.
Variable loan is the way to go
One of the key advantages of a variable loan is that it provides flexibility. Should you find that you have surplus cash each month you can increase the repayments to pay the loan off faster. Or if you receive a bonus this can be paid into the variable loan which can potentially save substantial interest payments in the longer term. These overpayments into the loan can also be redrawn should you find the need for the funds elsewhere.
Overpayments on both loans
Fixed rate loans on the other hand are a little more restrictive in terms of overpaying or redrawing from the loan. For example, a Commonwealth Bank fixed rate allows overpayments of up to $10,000 per annum without any interest adjustment payable. Any amount over $10,000 may attract a fee to adjust the interest payments. Unlike a variable loan, once these funds are paid into the loan they cannot be redrawn.
As fixed rate loans are for a defined period of time they are less flexible should you want to repay the loan early. As a result of the fixed nature of the loan, you may be liable for break costs if you repay it before the end of the fixed period.
With this in mind, if you are looking for the security of a fixed rate, but would also like to keep your options open in the event of an improved financial position; ensure that you consider carefully the length of time you fix your loan.
You can do both
You can also safeguard against unpredictable market conditions by taking out a Split Rate Loan. This option allows you to 'hedge your bets' by nominating how much of your loan is fixed and how much is variable.
Recent increases in interest rates have many homebuyers believing they should lock in a fixed interest rate. While this would work to safeguard against future increases, the key is not to make a rushed decision. There is no guarantee of more rate increases, such is the volatile nature of the market, therefore many home loan buyers can choose the split option to have both certainties of future loan payments and an element of flexibility with a portion of the loan on a variable rate.
Another reason why you should select 'variable'
If you are in a position of complete financial flexibility, a variable rate home loan could be the best choice for you. Choosing a variable interest rate means you directly benefit when market rates drop. Create a budget to ensure you are able to make your repayments if rates rise and enjoy the periods when rates are lower.
Before you make the final decision
It is most important that you properly assess your situation and options before choosing your home loan. You will be able to make your repayments with ease if you have a well informed loan strategy that suits your individual needs.
A fixed rate home loan offers a range of terms at a set interest rate that is applicable for the agreed term of the loan. At the end of the fixed, borrowers can either fix their rate again or switch to a variable interest rate.
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