The fixed rate home loan vs the variable rate home loan debate has raged for decades. Recent studies have pointed to the variable rate loan being much more popular. So is the fixed rate home loan heading for an early grave? Or is there more to it? Recent data has shown that fixed rate might be a more viable option than ever before.
Fixed rate home loan borrowers got their fingers burned during the global financial crisis, and this has left mental scarring for many who were considering this option. Analysts think, however, that this theory isn’t justified as it will not likely happen with the low rates that are on exhibit at the moment.
With the RBA reserve rate at its record low 2.25% buyers may be tempted towards a fixed rate loan. And with another rate cut expected in May, this may become a trend if the banks decide to follow suit and lower their rates also.
Fixed vs. Variale
The main advantage of a fixed rate home loan is the certainty of repayments. You won’t get swept up in the rollercoaster that is variable rate and be left with interest shock. If the reserve bank raises interest rates, especially sharply, your variable loan may leave you struggling with the increased repayments. If interest rates stay at a similar rate or drops, variable home loans will come out on top.
If you’re looking to sell your home, variable is the way to go, as with a fixed rate loan, you’re locked in. It also has the flexibility to change to a fixed rate loan whenever you’d like, whereas you can’t opt out of a fixed rate loan easily, you usually have to ride out the 1, 3 or 5 year term.
Variable loans also have a lot more flexibility in making extra payments. Also, repaying the loan early before the loan term expires isn’t possible with a variable rate home loan.
With the market at record lows for both fixed and variable rate loans, while the immediate forecast is for them to stay low, or go even lower, they won ‘t always be. Lenders are urging borrowers to not borrow to capacity as they’ll struggle when the interest rate rises.
At the end of the day, regardless of whether it’s marginally better or not, fixed rate home loans will have a loyal following for those that like to know what their repayments will be up front and can budget for it. With the reserve rate at a record low 2.25%, it would seem like now is the time to switch, but with fixed and variable rate interest rates predicted to go even lower, experts recommend holding off for the short term. If you’re on the fence, you can always go half and half on variable and fixed. Know your options and what’s available.