If you are looking to purchase a home, you may have already started your research into the various home loan packages available. One noticeable area of divergence in home loans is how the repayment rates are calculated; in Australia there are two types of repayment interest rates, fixed rate or variable. Fixed rate home loans like this one have a fixed interest rate for a set period (usually five years.) Repayments on a variable rate home loan will fluctuate depending on the rate set by the Reserve Bank of Australia (RBA.)
So, which one is better for you? Let’s explore the two options further and find out.
Fixed rate home loan
A fixed rate home loan will have a higher interest rate than a variable rate, but it offers more security. A fixed rate of interest ensures that the repayment amount doe not change. This type of loan is better for someone with a strict budget.
Pros:
Set and forget loan; with fixed payments you know exactly how much you need to spend each month/fortnight/week.
You are protected against interest rate surges for the fixed term.
Cons:
Higher rates of interest rate than a variable loan.
Inflexible. Re-financing a fixed rate loan will incur high amounts of fees.
Variable rate home loan.
A variable rate home loan has a lower interest rate than a fixed rate but can be changed at any time by your lender. If interest rates are low, a variable rate loan represents great value. Choosing a short to medium term home loan (10-20 years) at a variable rate over a fixed rate could save you a lot of money.
Pros:
Lower interest rates.
More flexible, suited to those who aren’t afraid of renegotiating a better deal in five years’ time.
Cons:
At the mercy of the RBA.
It can be harder to budget for repayments if interest rates fluctuate.
That is the basics of fixed rate vs variable, but there are subtle features that can influence what home loan is right for you. There are many shady loan vendors out there, happy to sign you up for a dud loan. End your search for an Australian owned and based lender that offers competitive fixed-rate and variable rate home loans; check out NPBS. My pick from NPBS home loans would be the real deal, a variable rate home loan, packed full of money management features.
The reason I like the real deal home loan is the same reason I favor variable rate loans in general, flexibility. Unlike a fixed rate loan, some variable rate loans like the real deal offer a repayment facility, meaning you can make extra repayments to your loan. A variable rate loan taken out when interest rates are low, coupled with extra repayments could be the cheapest and quickest home loan available.
The flexibility of a variable rate loan means you can renegotiate the terms of your loan with a lender and not incur pain full fees.
Choosing between fixed rate and variable depends on your situation and budget. A fixed rate loan is perfect for someone with an airtight plan who wants a set and forget repayment that doesn’t change. If you are looking for the cheapest possible home loan, with the ability to make extra repayments and withdraw funds if needed, a variable loan is hard to beat.
Regardless of what loan you decide on, make sure you are banking with a trustworthy financial institution that cares about you. A caring lender might seem a bit far fetched, but it’s 2019, the fatcat, cigar-smoking banker of yesteryear is out, the local caring lender is in, and I couldn’t be happier.
