Fixed vs. variable home loans: which one is right for you?

CHOOSING the right home loan is one of the most important financial decisions you’ll make when purchasing a property.

Fixed and variable home loans are the two primary options available, each offering distinct advantages and considerations. Understanding the key differences can help you select the loan that best aligns with your financial goals.

What is a fixed home loan?

A fixed home loan locks in your interest rate for a specified period, typically ranging from one to five years. During this time, your repayments remain consistent, regardless of market fluctuations or interest rate changes. This offers a sense of stability and protection from rising rates. However, fixed loans often come with limitations, such as restrictions on extra repayments and a lack of flexibility in accessing funds. Additionally, if you decide to exit the loan early, you may incur break costs, which can be significant.

What is a variable home loan?

A variable home loan is subject to market interest rates, meaning your repayments can fluctuate over time. As rates rise or fall, your repayments will adjust accordingly. While this offers flexibility, allowing you to make extra repayments and access features like offset accounts and redraw facilities, it also introduces unpredictability. If interest rates rise, your repayments will increase, making budgeting more challenging and potentially harder to plan for the long term.

Factors to consider when choosing between fixed and variable loans

When deciding between a fixed or variable home loan, it’s important to consider your financial goals. Are you seeking stability and predictability, or do you prefer the flexibility to make extra repayments and adjust as needed? Market conditions also play a role; if you anticipate interest rates rising, a fixed loan might be more appealing. Conversely, if you expect rates to fall or remain steady, a variable loan could be a better option. Your budget is another key consideration, can you manage potential increases in repayments, or would you prefer the certainty of fixed repayments? Additionally, consider whether you need features like offset accounts or the ability to make extra repayments.

The best of both worlds: split loans

If you find yourself torn between the stability of a fixed loan and the flexibility of a variable loan, a split loan might be the perfect solution. With a split loan, you can fix a portion of your loan while keeping the remainder variable. This allows you to balance the benefits of both types of loans, offering stability for part of your loan and flexibility for the rest.

Navigating the complexities of home loans can be overwhelming, but you don’t have to face it alone. The team at UFinancial is here to help you assess your financial situation and find the loan option that’s right for you.

For more information, head to ufinancial.com.au