Fixed or Variable Loan – Which Is the Better Option?

If knowing how much you pay each month on your home loan is important to you, this may be an indication you should consider fixing. For example, if your budget is too tight to accommodate a potential rise in interest rates.

A fixed-rate loan may be of less value if your finances can cope with a sudden increase in repayments.

An easy way to stress test your financial position is with an online repayments calculator. Use the calculator to see how much an increase in percentage points would bump up your repayments.

Now, look at the impact on your household budget. Are there discretionary items you can cut back on to absorb the increase in repayments or will the consequences be more serious? If faced with the prospect of digging into money you’ve allocated for essentials like groceries, bills and transport, then you know a rate rise could leave you struggling. In this scenario, having the stability of a fixed-rate loan may be beneficial – because you will know exactly how much you owe each month whether rates rise, fall or stay the same.

It’s important to note that fixed-rate loans are not without their limitations. Most restrict the number of additional payments you’re allowed and penalise for an early payout.

Your mortgage broker is an excellent resource for advice about the pros and cons of switching to a fixed loan. We’ll explain the fees and restrictions you’re likely to encounter and which products are a better match to your circumstance.

When you speak with your Yellow Brick Road representative on the topic of fixed vs variable, these are the issues we’ll ask you to consider.

Will you want to make extra repayments?

With a variable rate loan, you can pay as much as you want onto your mortgage without penalty – handy for chipping away at your outstanding debt and ongoing interest. By contrast, some fixed-rate loans don’t permit any extra repayments. Others may allow you to pay small amounts above the scheduled repayments, but charge you break fees if you go over this amount.

Selling  your property when the loan is fixed?

Breaking a fixed-rate contract is usually a costly exercise due to high exit and switching fees.

Is redraw or offset important to you?

Redraw and offset are standard features of variable loans, but harder to find in fixed mortgages. If it’s important to have these features on your fixed-rate loan, you can opt for a fully-featured fixed loan that comes with higher interest rates and fees.

Have you looked at what fees you might have to pay?

Some fixed loans charge higher fees than their variable rate equivalents. Look at the comparison rate of products you’re interested in and check for the existence of application fees or ongoing fees.

Will you want to lock in the advertised rate?

A rate lock allows you to lock in the interest rate that you applied for, so you’re protected from a rise during the loan approval period. If you don’t choose the rate lock option, you receive the interest rate on the day that your loan is advanced.

Have you considered a split loan?

If you can’t decide between fixed or variable, a split loan might be a good compromise. It allows you to divide your mortgage between fixed and variable interest rates, which gives you a foot in both camps. The fixed part of your loan is protected against interest rate rises, and the variable portion of your investment allows for the flexibility of making additional payments without penalties.