Fixed vs Variable Home Loans: How to Pick the Right One

January 13, 2023
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Key takeaways:

  • Fixed-rate home loans are tied to a specific interest rate for the life of the loan, and they come with a fixed rate period.
  • Variable-rate home loans start with a fixed rate for an introductory period, after which your rate may change depending on how an index (usually the prime rate) moves over time.
  • The split home loan enables you to enjoy the benefits of both variables and fixed home loans.

The fixed vs variable home loans question is on the minds of many first home buyers. So, before you take the leap, we’ll walk you through what they are and the pros and cons in each loan option.

What is a fixed-rate loan?

A fixed-rate loan is a loan that provides a fixed interest rate for the loan term. Fixed-rate loans are good for consumers because they help you predict how much your monthly payments will be, and they help you budget more effectively.

A fixed-rate loan is generally better when interest rates are relatively low and are expected to rise in the future. By taking a fixed-rate loan, you could save yourself money by locking in at a lower interest rate than what will eventually be available on the open market.

Fixed vs Variable Home Loans

Pros of fixed-rate loans

  • Fixed rates do not increase during fixed term regardless of open market rate fluctuations
  • Borrowers can choose the time frames of a fixed period
  • Borrowers know their monthly payment upfront
  • Easier to calculate the total loan cost

Cons of fixed-rate loans

  • Fixed rate comprises the agreement terms
  • Fixed rates do not drop during open market rates decline
  • They are more costly than variable rates

What is a variable interest rate mortgage?

A variable interest rate loan is a loan that charges interest rates according to an underlying market index, like the reserve bank, federal funds rate, prime rate, etc. The rate that you pay may increase or decrease over time, depending on the market rates.

Variable interest rates are depending on the current market rate, so in theory, your payment will change as long as your loan is mixed with interest and principal. Besides, home loan application variable rates are applicable on credit cards, car loans, corporate bonds, and personal loans.

Pros of variable home loans

  • Loan payments decrease when the market’s interest rates drop
  • Low introductory rates for starting loan period
  • Interest rates are relatively lower than a fixed loan

Cons of variable home loans

  • Borrowers may not calculate the total cost of variable home loan upfront
  • Greater risk if the loan is overcapitalized
  • Loan payments increase with a rise in the market’s interest rates

Fixed vs variable home loans: How to pick the right one?

Fixed vs Variable Home Loans

When it comes to getting a home loan, choosing between a fixed rate and variable rate home loan can be a difficult decision. If you’re looking for the best value, keep your eye on the prize: your financial future.

Here’s what you need to know about fixed vs variable home loans:

Loan term

You have the option of choosing between long-term and short-term debt. The frequency of rate changes, should conditions change, is also a deciding factor on whether to choose variable or fixed rates.

In general, people will choose variable rates if they are planning on paying off their loan in less than five years. It’s because they can choose to refinance the loan once they have paid it and save money in interest payments by doing so.

Interest rate spread

Interest rate spread is the difference between what you’ll be paying with a fixed or variable loan.

So, always look at the interest rates and terms for both fixed and variable-rate loans before deciding on a new home loan.

Interest rate trends and forecast

Interest rates may go up and they may go down. If interest rates are going to change in your favour, it’s better to lock into a fixed interest rate agreement.

However, if you think interest rates going down is probable in the near term, then choose a variable rate agreement.

Personal income forecast

Make better financial decisions by evaluating your income situation and the need for security. If you don’t have or anticipate a high salary, a fixed rate is the way to go.

If your income is steady or increasing, there is less risk in variable rates as you will have more usable funds to meet rising expenses.

What is a split home loan?

Fixed vs Variable Home Loans

A split-rate home loan is a mortgage in which the principal amount of your loan is split up and put into two different accounts. One portion comes with a fixed interest rate, and the other one has a variable interest rate.

Pros of a split home loan

  • The fixed account can offer you budgeting security
  • Make penalty-free additional repayments on your variable loan portion
  • If interest rates decrease, you may pay less interest rate on the variable portion
  • You can decide the proportions of your home loan split

Cons of a split home loan

  • If rates decrease, you won’t pay less on your fixed portion
  • Borrowers may pay extra fees on a split-rate home loan
  • Borrowers may pay a break fee on refinancing or paying off their split home loan early

Conclusion: fixed vs variable home loans: how to pick the right one

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Our AI match engine will match you with over 150,000+ properties and you can swipe away or shortlist easily. Making your home buying journey faster and easier.