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Is a fixed or variable home loan best for rising rates?

Is a fixed or variable home loan best for rising rates?

Rising interest rates are something Australians haven’t experienced since 2010, so it’s understandable that many homeowners are looking for ways to manage potential rising costs.

But higher interest rates don’t need to cause rising heart rates. You have options (and support from us). The best place to start is by considering your short- and medium-term financial needs, and doing a bit of old-fashioned research.

So let’s find out more and compare whether a fixed, variable or split home loan is the best choice for you.

Why are rates rising?

The Reserve Bank of Australia (RBA) increases the nation’s cash rate to mitigate inflation, control employment and promote economic growth.

The downside is that this can often cause home loan interest rates to rise if banks decide to pass them on – and ignites the age-old fixed vs variable debate.

How do I know what’s the best home loan for me?

There may only be a few options, but there’s a lot to factor in when choosing between them. And likely the biggest decision will be your appetite for risk with a variable rate, vs certainty with a fixed rate.

But beyond the risk and the rate, it’s also about you and your lifestyle. What’s your cash flow situation – can you put away extra funds, or will you need to dip in for future expenses? Do you have job security? And can you afford higher repayments if need be?

So many questions, so little time – luckily we’ve distilled the answers into a five minute read.

Why choose a fixed rate home loan?

Locking in a fixed rate home loan can provide certainty (for the fixed term at least), which is also great for tapping out of rate anxiety for a while.

Because your rate doesn’t change with the market, your monthly repayments will stay the same. That makes budgeting a lot easier – especially when planning things like weddings, holidays, etc – but it means you need to be ok with potentially paying more than others if the rates go down again.

Also, while you can make extra repayments, you can only add an additional $10,000 per year. Anything more will attract a penalty fee.

A great fixed rate can be appealing, but make sure you check out the variable rate you’ll pay once the fixed term expires. This ‘revert’ rate may be a lot higher than the fixed rate, so you’ll need to make sure you have enough money to cover the potentially higher repayments once the fixed rate period ends.

Why choose a variable rate home loan?

As the name suggests, variable rates move with the market. Because rates have risen for the first time in over a decade, it’s causing some nervousness, but it doesn’t necessarily guarantee that fixed rates are the better option.

The obvious advantage of variable rates is that if they do go any lower, then so will your repayments.

You’ll also likely have the flexibility to make extra repayments. And you can use a redraw facility to withdraw additional repayments when you need them, so it’s a lot more flexible with your lifestyle too.

You can also reduce the interest you pay with an offset account, a transaction account linked to your home loan.

At the end of the day, it comes down to how you tolerate risk. If rates rise through the roof, your roof (and everything under it) could get a lot more expensive.

Why choose a split home loan?

Like the idea of locking in a great rate but unsure about the commitment factor?

Enter split loans, which enable you to divide your home loan between a fixed and a variable rate. It’s like taking an each way bet – giving you the flexibility of a variable rate with the certainty of a fixed rate.

It’ll also give you the ability to tune out of the rate race. By hedging your bets, you’ll focus less on what the markets are doing, and more on what you’re doing.

Getting better informed about home loans is simple. Just get in touch with the Virgin Money Home Loans team.