Deciding between a variable and fixed rate home loan involves understanding the unique characteristics of each option, tailored to your financial circumstances and goals. At Navanti Finance, we aim to provide clarity on this decision-making process, ensuring you make an informed choice.

Understanding Loan Products

We aim to provide clarity on common borrower questions regarding whether to choose a variable or fixed rate home loan. The key distinction lies in understanding that a bank’s variable and fixed rate loans are distinct products, each with its own interest rate and terms & conditions. Similar to any price list, a bank’s advertised interest rates for both variable and fixed products can change at the bank’s discretion: 

Variable-Rate Loans: 

• Variable interest rates can fluctuate over time based on market conditions. You can switch from a variable rate to a fixed rate, but this transition is treated as you are switching into a new loan product. Therefore, you can’t directly “lock in” your variable rate without it being considered a different product line, potentially with different terms and conditions.
• Variable interest rates typically align with decisions made by the Reserve Bank of Australia (RBA) regarding the cash rate. However, each bank retains the flexibility to adjust its variable rates independently.

Fixed-Rate Loans:

• Fixed rate loans mean the same interest rate remains throughout the fixed term period selected. This provides stability and predictability in your monthly payments. However, if you decide to switch back into a variable rate during your fixed term, you may incur hefty penalties or fees.
• Banks’ fixed rate products are priced based on short-term economic trends and forecasts for periods such as 1, 2, 3, 4, or 5 years. Consequently, these fixed rates are subject to change and are less predictable regarding when each bank will adjust its fixed rate offerings.

Variable Rate Home Loans

Pros:

• Repayment Flexibility: Allows varied repayment structures, facilitating quicker loan payoff without additional costs due to interest rate changes.
• Easier Refinancing: Simplifies switching to better loan terms or lenders, avoiding break costs normally associated with fixed rate loans.
• Potential Savings: Benefits from reduced repayments if interest rates decrease, reflecting current economic conditions.

Cons:

• Rate Fluctuations: Subject to unpredictable changes, leading to higher repayments influenced by factors like the RBA’s cash rate increase or lender’s out-of-cycle rate increase.
• Cash Flow Uncertainty: Challenges long-term cash flow prediction, necessitating effective use of loan features like offsets and redraw facilities.

Fixed Rate Home Loans

Pros:

• Stable Repayments: Payments remain unchanged throughout the fixed term, providing financial security even if interest rates rise.
• Budgeting Ease: Simplifies long-term financial planning and budgeting.

Cons:

• Break costs: Paying off or refinancing out your loan during the fixed rate period will incur a hefty penalty in break costs.
• Limited Flexibility: Restrictions on extra repayments that can be made into a fixed rate loan and offset account features are generally not available with fixed rate loans.*

*Please note that there are a few banks and lenders who do offer fixed rate loans with 100% offset account facility.

Key Considerations for Borrowers

When deciding between variable and fixed rate loans, consider the following factors:

• Compare the current variable rate offered by the bank with available fixed rates. Evaluate whether locking into a fixed rate aligns with your forecast of future RBA cash rate movements and potential financial benefits.
• Assess your need for flexibility in managing your loan balance, such as making extra repayments or utilising an offset account. Variable rate loans typically offer more flexibility in these aspects, whereas fixed rate products often impose limitations on extra repayments (usually around $10,000 per year).
• Lastly, consider whether the stability of fixed repayments over a set period (e.g., 1, 2, or 5 years) appeals to you, regardless of economic fluctuations.

Historical Trends and Recent Insights

Traditionally, the majority of Australian borrowers have shown a preference for variable rates, driven by their flexibility and initial cost savings. However, during periods of economic uncertainty during the recent pandemic, many borrowers opted for the much lower fixed rates offered by banks. Post-pandemic, with the multiple RBA cash rate increases and upward trend predictions on the cash rate in the short term, variable rate loans have returned as the chosen product among the majority of Australian borrowers. 

Making an Informed Decision

Ultimately, the decision between variable and fixed rate loans hinges on your individual financial situation and objectives. Staying informed about economic trends is crucial, but navigating these choices requires personalised advice that considers your specific needs. At Navanti Finance, we prioritise understanding our clients’ unique circumstances to provide tailored advice. Contact us today for a personalised consultation to determine whether a variable or fixed rate loan best suits your financial goals. Let us guide you towards making the right choice for your future.