Should you choose a fixed, variable or split loan?
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It’s the question every Aussie with a mortgage has to grapple with – should I choose a fixed, variable or split home loan?

John Tindall, principal of Sydney-based financial advisory firm Accumulus Home Loans, breaks down the mortgage jargon, explains the pros and cons of each loan type, and shares his thoughts about which approach is best.

Three-bedroom house in Glebe

Fixed-rate loans offer greater stability; variable-rate loans, greater flexibility. Picture:

What is a fixed rate loan?

A fixed-rate loan is a loan with an interest rate that stays the same over a set period of time. Homeowners with a fixed-rate loan often find it easier to organise their budget than those with variable loans, as each month they pay the same amount in mortgage repayments.

“Although most lenders allow some degree of additional repayments, your fixed rate loan is a bit like a big ice cube which reduces at a steady, predictable pace,” says Tindall. “And that means you can budget for it.”

Advantages of a fixed-rate loan

The main advantage of securing a fixed-rate home loan is that you know exactly what your monthly repayments will be over a given period. But there are other advantages, too.

  • Makes it easier to stick to a budget – fixed interest rates mean fixed monthly repayments, and that means you can work out your monthly expenses more accurately during the length of your fixed term.
  • Set financial goals with confidence – by making it easier to stick to a budget, fixed-rate loans enable you to plan for the future.
  • Rate rises won’t affect you – fixed-rate home loans protect you from interest rate rises. It’s therefore worth considering a fixed-rate loan when interest rates are low and more likely to increase during the length of your fixed term.

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Disadvantages of a fixed-rate loan

The certainty afforded by a fixed-rate loan is a double-edged sword. While it makes budgeting easier, it can also cost you money. Here are a fixed-rate loan’s main disadvantages.

  • Rate drops won’t apply to you – just as a fixed-rate home loan protects you from unwanted rate hikes, it also prevents you from enjoying the benefits of a rate drop.
  • Harder to pay off your loan sooner – most fixed-rate loans come with restrictions on additional repayments, which prolong the length of your mortgage and makes it harder to reduce your interest payments.
  • Less chance of a redraw facility – a redraw facility allow borrowers to access any repayments they have made on their loan that exceed the minimum required repayments. Most fixed-rate loans do not offer this service.
  • Early repayment fees – most fixed-rate loans charge borrowers a break fee for paying off their loan early.

Each type of loan has pros and cons, depending on your financial goals. Picture: Getty

What is a variable rate loan?

A variable-rate loan is a loan with an interest rate that changes throughout the term of the loan, often in response to changes to the official cash rate or variations in banks’ funding costs.

“They have been great for the last 30 years, as interest rates have been mostly declining since early 1989. But they can have a nasty bite when they’re going up,” says Tindall.

Advantages of a variable-rate loan

Essentially the direct opposite of a fixed-rate loan, a variable-rate loan offers greater flexibility and a broader range of added features.

  • Extra payments are allowed – most lenders allow unlimited extra repayments, usually at no extra cost. This means you can reduce your interest payments and pay off your loan sooner.
  • Redraw facilities – variable loans generally come with a large suite of features, such as offset accounts and unlimited redraw facilities.
  • Benefit from rate drops – banks generally increase or decrease their rates in line with broader market movements. So, if the Reserve Bank of Australia decides to cut the official cash rate, you could be in the box seat to reduce your monthly interest payments.
  • Increased flexibility – lenders generally make it easier for borrowers to switch or alter the terms of their agreement if they have a variable-rate home loan.

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Disadvantages of a variable-rate loan

As with the fixed-rate loan, whether you view a variable-rate loan’s features as an advantage or disadvantage will largely depend on your personal financial situation and the state of the market.

  • Makes budgeting more difficult – variable interest rates make it difficult to accurately calculate your monthly expenses. As a result, borrowers may find it harder to budget and plan for the future.
  • Vulnerable to rate hikes – as lenders are wont to change rates in line with broader market conditions, signing up for a variable-rate loan means you run the risk of experiencing a sudden rate hike. Depending on the state of your finances when this happens, this could leave you in a state of mortgage stress.

What’s the major difference between a fixed rate and variable rate home loan?

A fixed-rate home loan is a home loan with an interest rate which remains unchanged for the duration of the fixed term – commonly between one to five years – whereas a variable-rate home loan is a home loan with an interest rate that can rise or fall.

Tindall says most people have a variable rate loan, either because they haven’t remortgaged for years, or because they thought that interest rates would drop over time.

“And they’ve been mostly right for the past 30 years,” he says.

Three-bedroom house in Surry Hills

Spit loans allow borrowers to more accurately manage their mortgage’s level of risk and security. Picture:

What about split loans?

A split home loan is a home loan that allows the borrower to nominate a proportion of their loan as fixed and a proportion as variable. Playing both sides of the fence like this allows borrowers to more accurately manage their home loan’s level of risk and security.

For example, split loans with a larger fixed component afford borrowers more stability than a 100% variable-rate loan, whilst still allowing them to make additional repayments so that they can pay off their loan sooner.

And split loans with a larger variable component afford borrowers more flexibility than a 100% fixed-rate loan, whilst minimising their exposure to sudden interest rate fluctuations, so that they can budget more accurately.

“In my opinion, it’s mainly a considered choice between predictability and flexibility,” says Tindall.

Case study

Sarah and Peter borrow $440,000 to buy a $600,000 apartment.

If they opt for a fixed-rate home loan with an interest rate of 4.50% and a three-year term, they will pay $2,456 a month (including $10 monthly fees and based on a 25-year loan period).

If they choose a variable rate loan at 4.25%, they will initially pay $2394 a month, although their repayments will rise to $2,516 a month if the bank raises rates to 4.75%.

Plumping for the fixed-rate option will cost them an extra $62 a month at first. But it will save them money in the long-run if interest rates spike.

Given Sarah and Peter plan to have a baby soon, they decide to fix 70% of their home loan for 3 years to reduce their exposure to potential interest rate hikes and make it easier to stick to their budget.

Choosing a split loan rather than a fixed-rate loan also allows them to make extra repayments when they can afford to do so.

woman banking

A split loan allows for more flexibility. Picture: Getty

So, what’s best?

As with most financial matters, neither option is better than the other; which option is best for you depends on your personal situation and the state of the market.

“If you’re concerned about the impact on your family budget, then consider a fixed-rate loan,” says TIndall.

“If you want to smash your loan down, consider a variable rate. If you want a bit of both, then split. And if you’re confused, ask a lender or a mortgage broker.”

Things to consider before choosing a home loan

  • How is the market currently tracking? If interest rate cuts are expected in the future, you might want to opt for a variable-rate loan or a split loan with a larger variable component so that you can benefit from reduced interest payments. Likewise, if hikes are more likely, a fixed-rate option might be a better idea.
  • How stable is your current financial situation? If you are a freelancer or have some major expenses just around the corner (i.e. you’re planning to get married or have a baby), the stability of a fixed-rate loan might be best for you. That way, you’ll protect yourself from sudden interest rate hikes.
  • What are the lender’s setup fees? Some lenders will charge you every time you split your home loan into different components.
  • Does the lender allow you to make additional repayments? Some lenders will allow you to make repayments without extra fees or penalties attached.
  • Does the lender charge extra for added features, such as redraw and offset account facilities?
  • Are there penalties for additional repayments? Making extra repayments can cut your loan by years and can save you thousands.




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