Fixed vs variable loans
If you’re about to buy a house or you’re looking to refinance you may be asking yourself, should I fix my home loan or not? Especially with interest rates at an all-time low.
Here are some things to consider to help you decide.
Benefits of fixing your home or investment loan
Fixed rate home loans are usually for a set period of time – often 1, 3 or 5 years.
Here are the advantages of fixing your loan:
- Fixed repayments – You know exactly what you’re repaying in a fixed loan. Whereas with a variable rate loan your repayments can ‘vary’ as rates change.
- Rate rises don’t matter – If interest rates rise above your fixed rate, you will be happy knowing you are paying less than the variable rate. In case of a variable loan, rates will increase in case your bank increases the rate.
Disadvantage of fixing your loan –
Here are the disadvantages of fixing your home loan:
- Rate drops will annoy you – If rates go down below your fixed rate you will be repaying more than the variable rate and you won’t benefit from the rate drop.
- Extra repayments – Extra loan repayments are often not allowed if you have a fixed rate, but may have a limit of extra repayments during the fixed term or may only be allowed with a fee. Variable rate loans usually allow you to make extra repayments at no cost and there is often no limit.
- Break fees – Fixed rate loans may also have a break fee if you change or pay off your loan within the set period e.g. if you sell your home. Whereas in case of a variable loan, usually there are no exit fees.
- Mortgage offset account – Under a fixed loan you won’t get mortgage offset account. Whereas mortgage offset account is a standard feature of variable rate loan in most cases.
What is Mortgage Offset Account?
Mortgage offset links an everyday savings account to your variable rate home loan, and uses the money in that account to offset your loan balance. The more money you have in the account, the less interest you pay on your home loan.
With a standard home loan, you’re paying interest on the total amount still owing on your home loan. But not with offset. Instead of being charged interest on the full home loan balance, you’re charged interest on your home loan balance minus the amount in your linked everyday account i.e. mortgage offset account. In this way, the balance in your account ‘offsets’ the amount owing.
Example – You’ve taken out a 30-year mortgage for $400,000. We’re going to assume you have, on average, $10,000 is sitting in your linked mortgage offset account. Effectively, you end up paying off your loan sooner—as interest is calculated on loan amount minus amount sitting in your mortgage offset account.
Usually your home loan interest is worked out on a daily basis, calculated on the balance of your loan (and then charged monthly). What does it mean for an offset customer? Every dollar you have in your linked bank account (mortgage offset account) saves you interest every day that it’s there.
You don’t need to be rich. Even maintaining a balance of few hundred dollars can save thousands in interest.
Note – It is important to read your loan contract to check all terms and conditions of the loan so you know what you are up for.
Another option is to make a bet both ways and only fix part of your home loan.
Some people fix 50% of their loan and keep 50% as variable to manage some of the risk of interest rate rises while still being able to make extra repayments.
No one can accurately predict how interest rates will move but as long as you’re happy paying the amount on a fixed rate loan, and you don’t need the flexibility of making free extra repayments in the short term, a fixed rate loan is a reasonable option.
Note – This article only provides general knowledge on fixed and variable rate loans and doesn’t constitute to personal or expert advice and nor does it take your personal circumstances in to consideration. Any reliance on this article is solely at your risk. The article is provided for general information only, Expert Tax are not engaged to render professional advice or services through this article. Expert Tax expressly disclaim any liability and responsibility to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this article. No person should rely on the contents of this article without first obtaining advice from a qualified professional person.
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