If you’re looking to buy a home, then making sure you choose the right home loan for your needs will be an important decision. There are two main types of home loans - fixed and variable. It’s also possible to get a split home loan, where part of the loan is fixed and part of it is variable.
When talking about fixed and variable home loans, we are talking about whether the interest rate on the amount of money you have to repay to the bank is either fixed at one rate, or variable over time. Both fixed and variable home loans come with certain advantages and conditions, and the type of home loan that’s right for you will depend on your own circumstances. So have a read below of what kind of home loans are available and which ones are better for different situations.
What’s the difference between fixed and variable home loans?
The difference between a fixed home loan and a variable home loan is whether the interest rate attached to the loan remains fixed from the beginning of the loan, or is variable throughout it.
In a fixed home loan, you agree with the bank at the time you take out the loan what the interest rate will be for a certain period of time. The interest rate gets locked in and is guaranteed to stay at the same rate, no matter what happens to the market.
In a variable home loan, your interest rate will start out at an agreed amount, but can be changed by the bank. The interest rate will be changed according to variations in market interest rates. If interest rates go up, you’ll be required to make a larger minimum repayment and, if they go down, you’ll be required to make a lesser minimum repayment.
Fixed Home Loan
With a fixed home loan, you and the bank will agree on a specific rate that will apply to the loan for an agreed-upon duration. Greater Bank offers fixed loan rates for periods between 1 and 5 years. Have a look at the specific details for Greater Bank’s loan products to see which one is right for you. They include the Ultimate Home Loan, the Great Rate Home Loan, the Investment Ultimate Home Loan, and the Investment Great Rate Home Loan.
The major benefit of a fixed home loan is that you have the security that your interest rate won’t change, even if the market does. It makes it easier to budget for the future because you can be absolutely certain about the amount you need to pay back.
The specific interest rate of a fixed home loan will depend on how long the fixed period is that you and the bank agree to. If the period is longer - for example, 5 years - The interest rate may be slightly higher to allow for potential market changes. On the other hand, if you entered a fixed interest loan for 1 year, for example, your interest rate might be lower, as any changes might have higher degree of confidence than a longer-term rate. So the interest rate is balanced relative to the duration of the guarantee that the rate will stay the same.
Fixed Loan Summary
- Guaranteed interest rate, no matter how the market changes
- Easy to budget for the future
- Choose from the start the repayment schedule that works for you
- May be extra costs involved in repaying early
Variable Home Loan
A variable home with market interest rates. For example, when the Reserve Bank of Australia (RBA) cut interest rates by 0.25% in June of this year, Greater Bank passed on that interest rate cut to its variable loans. That’s a benefit that comes with a variable loan that a fixed-rate loan doesn’t offer. On the other side of that, if market interest rates go up, then the variable rate is likely to also.
One of the other benefits of a variable home loan is that you can make your repayments faster if you want. So, if you have cash on hand, you can repay it to reduce the remaining amount you pay interest on, without incurring fees.
All of Greater Bank’s home loan products - Ultimate, Great Rate, Investment Ultimate, and Investment Great Rate - have variable rate options.
Variable Loan Summary
- Flexibility of repayments
- Variable with the market
- Benefit from interest rate decreases
- Required to increase minimum repayments if interest rate rises
Split Home Loan
It’s also possible to split your home loan between a fixed and variable rate. This means you would take out a certain amount of money at a fixed rate, and another amount at a variable rate. The advantage of this is that you give yourself some security in your fixed-rate payments, but you can also benefit from the flexibility of a variable loan. | Greater Bank
Home Loan Tips and Hints
Choosing the right home loan for you really depends on your own personal situation and needs. Whether you go for a fixed loan, a variable loan, or a loan split between the two, you really need to consider your own personal circumstances. Each of the three options comes with its own advantages and drawbacks, but some will match up with different people better.
If, for example, you have strict budgeting goals and you really want the security of a fixed rate, it may very well be the best option for you. A fixed-rate might also just suit you better if you like to keep things simple and secure.
On the other side, a variable home loan allows you to benefit from market fluctuations. So, for example, you can benefit from interest rate decreases. But you have to be willing to ride the market if that’s the case. You’ll need to make sure your income, or your projected income, will be able to cover increases in the rate.
If you’re not absolutely sure about either option, you can split your home loan between the two, hedging your bets a little. You’ll get the security of knowing part of your loan is locked in at a certain amount, while you can still benefit from a potentially low variable rate.