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Should I get a fixed or variable loan? 🏠 FIRST HOME QUESTIONS 🤷‍♀

November 08, 2020

Hey Samara,

Home loans are getting more sophisticated all the time, and this is a great example. So, you probably already know what the difference is between a fixed and variable loan. But I’m going to go through it anyway, so you have some background before you chat to your mortgage broker for advice.

Plus, I enjoy talking about loan products. And yes, I am fun at parties.

John Minns, Managing Director
John Minns, Managing Director

What is a split loan?

A split loan is a loan (usually a home loan) that is split between a fixed rate product and a variable rate product. We like them because it gives you the best of both worlds. You can take advantage of the lower rates and extra certainty that usually attach to fixed rate products, as well as the flexibility of a variable rate product.

Fixed rate loans

A fixed rate loan ‘fixes’ the interest rate (and therefore the repayments) for the chosen term. Fixed rate loans are usually available for terms between one and five years. Some banks will also do longer terms but they could be at much higher rates.

This gives you security because you know what the repayment will be. They could offer you a slightly lower rate than a variable loan. People often choose a fixed rate if they’re concerned that rates are going to go up.

On the downside, there can be less flexibility. You might not be able to pay extra into your mortgage. There are also costly ‘break fees’ involved if you want to change lender or end the loan term early.

Variable rate loans

Variable rate loans often move at the same time as the RBA cash rate. When one rises, often the other does too (although bank rates will always be significantly higher, unfortunately). So therefore when one falls - you guessed it (although it’s not guaranteed). If rates go down, a variable loan allows you to take advantage of that instead of locking you into a higher rate.

Variable rate mortgages usually also allow you to make extra repayments to pay off the loan faster. It’s also easier to switch loans and find a better deal, since there’s no break costs. For people who want to throw everything they have at the mortgage and get it paid off as fast as possible, this often the choice they make.

So with all that background out of the way, how do you decide on the split? My best advice is to talk to your mortgage broker (I know you two are emailing regularly) and ask her to help you work out what’s best in your situation.

Here’s what one of our clients has done.

Carol fixed term her term for three years. When we were at pre-settlement inspection, she mentioned that she thinks she can pay off an addition 20% of the loan in those three years, so she’s fixing 80% of her loan and 20% is will be variable. That said, she’s doing this because in 2020 interest rates are at rock bottom and very unlikely to drop further. If we were in an era of high rates, she’d probably hedge her bets with a 50:50 split.

If it’s still too overwhelming, don’t panic too much. You don’t need to make your decision right now. You can settle with a 100% variable and then split or go fixed in a couple of months when you’ve had more time to think about it. You have so much else to think about at the moment… Which bank? Which insurance company? Which wall colour? Because yes, I saw those photos you posted and you really do need to paint those walls…

TAKEAWAYS
  • Fixed loans offer security against rate rises but don’t let you overpay or end the term early.
  • Variable loans offer greater flexibility, but if rates rise, so do your payments.
  • How you split the loan depends on whether rates are likely to rise or fall, and how much flexibility you need.
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