Fixed vs variable home loans in a time of rising interest rates

If there is one thing that’s certain, it’s how uncertain the future is. We never know what is going to happen, and the market is no different. Currently, the Reserve Bank has been increasing the interest rates month on month, which means lenders are raising their rates too. So, the question on every home buyer’s mind is ”What kind of loan should I take out”?

When it comes to home loans, they normally come in three types, broadly speaking: Fixed-rate home loans, Variable or Floating-rate home loans, and Split home loans.

Each of these loan types works differently and they each have their pros and cons. In this piece, we will be talking about each type of loan, their advantages, disadvantages and how they might apply to you in the current market situation with interest rates continuing to rise.

What are fixed-rate home loans?

A fixed-rate home loan is a mortgage loan where the interest rate is predetermined and stays fixed throughout the term of the loan, usually between 1-5 years. Once the term has ended, you can choose to fix your loan again at a new rate available at that time or switch to a variable rate if you want.

Pros

• You aren’t affected by any increase in interest rates in the market.
• You can pick a time period that best suits you, usually between 1-5 years.
• You always know exactly how much your loan repayments will be for that term, which makes it easier to plan your budget.

Cons

• If the interest rates fall you will still need to pay the rate for that term.
• They usually lack flexibility, meaning you’ll be limited in your ability to make additional repayments, or you might have to pay an early repayment charge if you want to pay off the loan sooner.
• They usually come with fewer or no features like redraw, offset accounts, etc.

Wondering what rates would best work for you? Contact your Nectar broker and ask them to help steer you in the right direction.

What are variable-rate home loans?

Variable or floating-rate home loans follow the market closely and are affected by economic conditions, particularly the official cash rate. Because of this, you can expect your repayment rates to go up and down in tandem with the wider market.

Pros

• Your repayments will usually go down when the official cash rate falls.
• Most variable-rate loans come with additional features like the ability to redraw, make extra repayments, etc.
• You can potentially pay off your loan much quicker.

Cons

• Repayments will rise with the interest rates.
• They can potentially go higher than fixed rates.
• It’s not as easy to plan your budget around them as your repayments can change month to month.

Want a helping hand in deciding what works best for you? Contact your Nectar broker and ask them to help steer you in the right direction.

Fixed vs variable rates, why not get both with a split loan?

Split or combination loans are a mix of fixed-rate and variable-rate loans. If you’re scratching your head over whether you should go with a fixed-rate or a variable-rate for your mortgage, you could consider going for a split loan and get the best of both worlds. With a split loan, you can divide your mortgage into two or more portions and designate which portions will be assigned a fixed-rate and which a variable-rate. Each portion is put together as a whole when you send your application for approval, however, they are treated as separate loans for the sake of documentation.

The major benefit of a split loan is, like we said before, getting the best of both worlds. You get security and stability for the fixed-rate portion, and the advantages of extra repayments, potentially lower interest rates and so on for the variable-rate portion. In other words, split loans let you play it safer with your funds.

So, fixed vs variable rates; what works best for today’s market?

We’ve seen the cash rate steadily go up since April 2022, and the Reserve Bank has indicated that this trend could continue. So, in a time of rising interest rates, what does work better? Fixed rates or variable? Well, the truth is that the answer depends on your unique circumstances. You may want to go for a fixed rate and avoid the risk of potentially making higher repayments. You may be willing to take the risk for the chance of getting a lower rate with a variable rate loan. Or, you could ‘hedge your bets’ and go for a split loan. It all depends on your preferences and where you are financially.

If you’re looking into buying a home and are wondering what kind of home loan you should take, then you should consider talking to your Nectar broker. From over 50 lenders they can help find the most appropriate options for you and share the resources that can help you make a better-informed decision. We’re here to help, so don’t hesitate to reach out.