There are a range of different features to compare when choosing a home loan. One of the biggest decisions is picking between a variable or fixed loan.
It's important to consider both options when deciding on which loan option is best for you.
Fixed rate home loans
Fixed home loans give you the security of a fixed interest rate, meaning no matter what happens in the market, your rate will remain the same for a period of time. This is a great way to budget as your monthly repayments don’t change, and if the interest rates increase then you’ll be fortunate enough to keep your current rate. On the other hand, if interest rates fall, you won't be able to take advantage of the reduced rate.
Fixed home loans typically have fewer features. For example, you are usually limited in the amount of extra repayments you can make and may not be able to redraw during the fixed loan period. In some cases, you may have to pay 'break costs' if you prepay amounts on the loan.
Variable rate home loans
A variable home loan, on the other hand, usually offers more flexibility than a fixed rate home loan. The rates move in line with the market which means your repayment amounts may change over time. Rates may rise or fall, which will cause a change to your repayment amount. The change may or may not be to your advantage – this is the risk you take by choosing a variable rate loan.
Variable loans also tend to allow for greater additional repayments so you can pay off your loan sooner. The ability to redraw is an added advantage allowing you to access your additional repayments should you need to pay for an unexpected cost down the track. Many variable rate home loans also offer an offset account so you can use your savings to reduce the amount of interest you pay.
If you like the sound of consistent monthly repayments but also the flexibility of the variable features, you can have the best of both worlds with a split loan. This is where you can choose a fixed rate for part of your loan and a variable rate for the rest. The fixed portion helps to protect you from rate rises while the variable portion allows you to pay off some of your loan sooner, and benefit from any falls in rates.
Consider your financial circumstances, the current market climate and your future financial health before making a decision on the loan features you want. There are many other factors that make up each loan type which a Home Loan Adviser can talk you through.