Should I get a variable rate or fixed rate?

This is a very common question. It is always hard to predict what the future holds economically. Let’s start with the difference between a variable and fixed rate loan.

Variable rate: A variable rate loan can fluctuate at any time, whilst generally fluctuations occur when the Reserve Bank’s cash rate changes. This is not always the case as banks can run promotions, offer discounts or put up rates at their discretion. A variable rate loan suits people who need flexibility in their loan, e.g. require a facility that they can pay down rapidly without penalty; or they may intend to renovate and will want to increase their loan; or they would just like the ability to change the loan if required.

Fixed rate: A fixed rate loan fixes in a rate for a specific amount of time. For example, if you fix your loan for 2 years and the rate is 4% p.a. - the rate will remain at 4% p.a. for that two year period. This generally suits people who want to lock in a repayment amount for a set period and budget accordingly. During the fixed term, the loan is static, which means you can’t pay the loan down substantially or pay out completely without penalties applying. Therefore, if you were considering selling your property in the near future, a fixed rate loan would definitely not suit you.

What can sometimes be a good option is a split loan. You can split the loan and have 50% on a fixed rate and 50% on a variable rate therefore getting the best of both worlds.

What is vital when considering which loan type may suit your needs is to look at what your plans may be in the next few years. If you see yourself moving or are gearing up to pay big chunks off your home loan, a variable rate will probably suit you more giving you the flexibility that you require.