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Fixed Rate Vs. Variable Rate Home Loans: A First-Time Buyer’s Guide

When buying a home, one of the most significant decisions you’ll need to make is the type of home loan you want to take out. The truth is that understanding all the home loan terms and conditions can be incredibly confusing – like the difference between a fixed and variable rate home loan.


Copy of Fixed Rate Vs. Variable Rate Home Loans: A First-Time Buyer's Guide
Both of these types of loans have their pros and cons, and understanding the differences between them can help you make the best decision that is in line with your long-term financial goals. Even seasoned property investors and current homeowners can gain a lot from weighing up their options regarding home loans, which is precisely why many lenders offer a refinance calculator alongside finance tools for first-home buyers.

Even with all these resources at your disposal, however, it can still be tricky to settle on a home loan. So how do you decide what’s best for you?

Today, we simplify everything you need to know about fixed rate vs. variable rate home loans, in a bid to give you a headstart on your home ownership journey. Read on to find out more! 

What Is A Fixed Rate Home Loan?

A fixed-rate home loan is one in which the interest rate remains the same for a contracted period of time. Fixed-rate loans are typically easier to understand and budget for, as you always know what your home loan rates and repayment will be. This can be a significant advantage for first-time homebuyers who may be on a tight budget and want to ensure they can afford their mortgage payment every month.

Furthermore, if you expect interest rates to rise over the next 1 to 5 years, locking in a fixed rate today could save you money on repayments in the future. At the end of a fixed term, you can choose to either transition to a variable rate home loan, or refinance to either a split rate home loan or another fixed rate home loan.

Benefits Of A Fixed Rate Home Loan

The benefits of locking in your rate for a fixed term include:

  • Certainty and peace of mind knowing your interest will not change.
  • Repayments do not rise if the official lender’s rate rises.
  • Fixed rates allow for more precise budgeting and cash-flow certainty.
  • Potential to save on additional fees and charges — variable rate home loans come with some extras, but these can be expensive, so if you’re happy to forgo them, you can avoid some fees and charges with a fixed rate.

Potential Drawbacks Of A Fixed Rate Home Loan

Some potential drawbacks to consider when choosing a fixed rate term include:

  • You won’t be able to benefit from any variable interest rate reductions if they occur within the fixed term.
  • Fixed-rate home loans typically have higher interest rates than variable-rate loans, which can make them more expensive in the long run.
  • Some fixed-rate loans have prepayment penalties, which means that if you pay off your loan early or refinance, you may have to pay a penalty or break fee.
  • A rate lock fee may be payable if you wish to protect yourself from changing interest rates prior to the settlement of your fixed rate loan.

What Is A Variable Rate Home Loan?

A variable-rate home loan, also known as an adjustable-rate mortgage (ARM), is one in which the interest rate can change over time. Rates on a variable home loan can rise or fall based on changes in the market, which means that your monthly mortgage payments can also increase or decrease accordingly. If you’re looking for flexibility in your home loan, a variable rate home may be a good option for you. Unlike fixed rate home loans, variable-rate loans also have appealing flexible features like the ability to utilise an offset account to help you pay off your loan sooner and save you interest.

Benefits Of A Variable Rate Home Loan 

The benefits of a variable rate home loan include: 

  • Variable-rate home loans often have a lower initial interest rate than fixed-rate loans. This can make the monthly payments lower in the short term, which can be appealing to first-time homebuyers.
  • Repayment flexibility — variable rate home loans typically offer more flexibility in terms of prepayment and refinancing options, as well as the ability to change your loan structure during the life of the loan. They also don’t come with prepayment penalties, which means you can pay off your loan early without incurring additional fees.
  • Because variable rate loans can adjust over time, they have the potential to offer significant savings if interest rates decrease.

Potential Drawbacks Of A Variable Rate Home Loan

Some potential drawbacks to consider when choosing a variable home loan include:

  • One of the main risks associated with a variable rate home loan is that the interest rate can fluctuate over time. If interest rates rise, your monthly payments could increase, which could make it more difficult to budget for your mortgage.
  • Because rates can change at any time, it can be difficult for borrowers to predict cash flow over the long term.

What Is A Split Home Loan?

A split home loan allows you to divide your home loan into two or more parts with different interest rates and loan terms. Essentially, it’s a combination of a fixed-rate home loan and a variable rate home loan. Generally, it is believed that splitting your home loan balance with a fixed and variable interest rate allows you to get the best of both worlds. The fixed portion provides stability and predictability in your mortgage repayments, while the variable portion provides flexibility and the potential for savings if interest rates drop.

With that said, it is important to note that a split home loan can come with additional fees and charges, so it’s important to carefully consider your options and weigh the potential benefits and drawbacks before making a decision.

Which Home Loan Is Right For Me?

Deciding between a fixed-rate and variable-rate home loan as a first-time buyer ultimately depends on your individual financial situation and goals. If you’re looking for stability and predictability in your monthly expenses, a fixed-rate loan may be the better option. On the other hand, if you’re willing to take on some risk and want to keep your initial costs low, a variable-rate loan may be a good choice. If you think both types of loans would suit you, a split home loan is always an option.

Regardless, it is vital to consider the pros and cons of each before making your decision. While there’s no right or wrong answer to which type of home loan to go with, it’s always best to know what your options are and what works best for your needs. Unfortunately, there is no crystal ball that can accurately predict how interest rates will change, which is why it is best to consider your lifestyle, financial situation and what features you need from a home loan when making your final decision.

And there you have it — everything you need to know about fixed rate vs. variable home loans for first-time buyers in Australia. By understanding the differences between these types of loans and considering your long-term plans, you can make an informed decision that meets your needs and helps you achieve your homeownership goals.

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