Fixed or variable homes loans – which is better?

With interest rates falling dramatically over the past few months, the key question is whether or not borrowers should fix their home loans. Almost every industry expert has a different view. Some senior economists are forecasting further large falls in the RBA cash rate whilst others say we’re nearing the bottom of the cycle. To the ordinary borrower, it can all be very confusing.

Of course, the reasons for choosing a fixed rate mortgage as opposed to a variable product may differ based on individual circumstances.

For first homeowners who are on a tight budget, a fixed rate mortgage is a great way to lock in a rate and know exactly what the payments will be for a few years while they are settling into their home. Fixed rates may be slightly higher than a variable option, but if knowing the rate is locked in helps borrowers sleep at night, it can be a great option.
On the other hand, a mortgage product with a variable rate may provide greater flexibility for homeowners looking at selling their property or who are looking to pay off their mortgage faster with extra repayments.

So what are the main things to be aware of?
A fixed rate loan may be costly to leave early. The majority of fixed rate loans will charge a break cost that is based upon the economic cost to the lender of reversing the funding they have locked away for the life of the loan. So if you anticipate paying out the loan early, a variable rate option may be more appropriate.

Do you want to pay off more than the required repayments?
Most fixed rate loans limit any additional repayments to a specific amount each year (eg $5,000) and if you put more into the account, the lender could pass on any costs.
Read the fine print

Variable rate loans can offer more flexibility when paying the loan back early, but this could incur high exit fees with many ‘introductory’ rate loans. It’s important to understand the terms and conditions of the product that you’re applying for