How do you choose between a fixed or variable rate loan?

One of the most common questions that many home buyers face is the issue of whether to opt for a fixed or variable interest rate with their home loan.

The answer to this will depend on your individual circumstances and your preferences, but it's important to know what each option entails before you make a decision about your mortgage.

Fixed rates

With a fixed rate, your home loan is locked into a certain level of interest for a specified period of time, usually from 1-5 years.

This option can be ideal for those who like to have the certainty and regularity that fixed rates bring, as it allows you to know exactly how much you will need to repay each time, and plan for this amount accordingly.

In the event that interest rates rise, a fixed option will come in handy. However, the disadvantage of fixed rates is that you may miss out on an opportunity to save should interest rates fall.

Variable rates

With a variable rate home loan, your interest rate is much more fluid and will fluctuate up or down depending on changes to the official cash rate, or other decisions from your lender.

Of course, the biggest advantage with this type of loan is that if the cash rate decreases (as it has done recently, down to 2.5 per cent) your interest rate may also decrease in response. This saves you more on the amount of interest you owe and could potentially see you paying off your loan faster.

However, if the cash rate were to increase, this would likely have the opposite effect and cause the interest rate on your loan to go up.

Split rates

Split-rate loans can be a great compromise, pairing a fixed rate on a portion of your loan with a variable rate on the rest.

This can give you the best of both worlds, in a sense, although it offers you less flexibility than a standard variable rate loan and less security than a conventional fixed rate loan.

If you're wondering which option would be best for you, speaking to an experienced mortgage broker could help you gain some clarity on the issue.