Fixed, split or variable interest home loans: How can I decide?

Lucy EldredDecember 17, 2020

When choosing a home loan, there are a number of factors to take into consideration. One of the main decisions is whether to opt for a fixed, split or variable rate home loan.

While bank loan approvals usually factor in a buffer in case interest rates increase, to ensure you can afford to repay them, the system isn’t foolproof and comes down to the individuals capacity to repay.

In the current interest rate environment, purchasers are increasingly opting for fixed loans. Home loan approval figures regularly put fixed interest rate demand at 25% of the market.

Variable interest rate loans, however, remain Australian borrowers’ favourite option.

But what should you consider?

Fixed

Fixed rates provide some peace of mind by ensuring that your repayments remain consistent over time. With rates low, it’s nice to lock in a lower repayment for a long period of time, particularly if you know you’ll struggle should rates increase.

If you’re leaning towards a fixed rate home loan, the biggest decision to consider is the length of time you’d like to lock yourself into the rate for. If interest rates drop over this time, then you could find yourself paying more than you’d have to. Similarly, if you lock in for a short period of time and it ends in the middle of a higher interest rate environment, you may not be able to get the same deal again.

Fixed rates could help you sleep a little easier, knowing that repayments and cash flow will be predictable and consistent over the term of the loan. This will allow you to budget specifically, and not be taken by surprise if rates change.

Paying the loan ahead of the term could see you paying hefty fees, and it may be worth considering a variable rate if your plan is to sell the property after some quickly realised gains. If you’re expecting a windfall and want to pay down your property quicker, or if you want to redraw or increase your loan there may be exit fees which apply.

Some fixed rate loans include redraw facilities, and some have more flexible terms around repayments allowing you to pay extra up to a certain amount.

As of 15th January 2015, the range of three year fixed rate products is around 4.45% p.a. to 5.09% p.a., while one year fixed rates range from around 3.99% p.a. to 4.94% p.a., according to Finder.com.au. Two year fixed rates range from 4.39% p.a. to 4.94% p.a., while five year fixed rates span 4.93% p.a. to 5.65% p.a.

Variable

Variable interest rate home loans, however, offer more flexibility. Paying lump sums is easier with fewer associated costs than fixed rate loans.

If you don’t have much capacity to increase your repayments, and bearing in mind what could happen if you end up with a sudden vacancy in an investment property, then you need to be wary of the impact of a rate increase. However, if rates decrease, then you could find yourself with a bit of extra cash on hand or paying off your mortgage sooner than expected.

Variable interest rates do tend to be lower than fixed offerings, and many have more features than fixed rate loans. However, they do have an added volatility level to be aware of.

If you’re borrowing less than you can handle, then you may decide that a variable rate is a good option in the immediate term – you can always fix later if necessary.

As of 15th January 2015, variable rates currently vary from around 4.48% p.a. to 5.26% p.a., according to Finder. Special low or introductory rates can be available for these loans.

Split

A split rate home loan is, obviously, the middle ground. Fixing a portion of the loan for that peace of mind, while keeping a separate part variable, can be a good option. This provides you partial protection from future interest rate changes.

This may be a good option if you’re keen to pay down your loan more quickly. In a situation where you’re making extra repayments, you can do so solely on the variable component of your loan.

However, you may also be required to pay the costs should you wish to break the fixed portion of the loan. It still acts very much like a fixed mortgage for that portion of the loan.

Remember, it doesn’t need to be a 50/50 split either. For instance, you may decide to fix $200,000 of a $250,000 loan.

It’s worth speaking to a home loan professional to get a clear understanding of how this may affect your repayments and security overall.

For help getting started in property investment, speak with a RAMS home loan specialist and pick up your free RAMS Investor Pack.

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Disclaimer: Information in this material in general and does not take into account your objectives, financial situation or needs and you should consider whether it is appropriate for you. You should also obtain independent professional advice relevant to your financial circumstances.

The taxation positions described are general statements and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation.

RAMS Financial Group Pty Limited does not endorse or assume any responsibility for the advice, content or services provided by Property Observer or any other third party referred to in this material.

RAMS Financial Group Pty Limited ABN 30 105 207 538 AR 405465 Australian credit licence 388065. Credit provider and issuer of RAMS deposit products: Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.

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