VARIABLE vs fixed Rates

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  Variable rate home loans are popular and offered by most lenders. With a variable rate loan, the interest rate you are charged can fluctuate in line with market interest rate changes. Because of this, your home loan repayments may also vary. Generally, the variable interest rate on your loan will move in line with the market rate set by the RBA, but banks can set their own interest rates and change them at any time.

• You can make extra repayments to pay off your home loan sooner. Making additional repayments above your minimum repayment amount can reduce the term of your loan and save you money on interest. Visit our website and use our repayment calculators to see the difference that extra repayments can make to the term of your loan and to find out how much you could save.
• You get a redraw facility that allows you to withdraw your extra loan repayments if you need to access the money. (Some lenders do have minimum amounts you can redraw, see our Redraw & Offset Information fact sheet for more information.)
• You can use an offset account to reduce the interest you pay. That’s a transaction account linked to your home loan where the balance is ‘offset’ daily against your loan balance before interest is calculated. This reduces the principal amount the interest due is calculated on. (See our Redraw & Offset Information fact sheet for more details).
• Flexible repayment options so you can make your loan repayments weekly, fortnightly or monthly— whenever is most convenient to you. This can help maintain your budget requirements and align with your pay cycle to make it easier to manage your loan repayments.
• You can choose to split the loan to gain more control of the interest rate. That means you can have a fixed interest rate on a portion of the loan for up to five years, and a variable interest rate on the other portion of the loan. This allows you to gain some protection from potential interest rate rises.
• You can switch loans and lenders more easily if you have a variable rate loan. All variable mortgages advanced on or after 1st July 2011 have no early repayment penalties or exit fees. (However, lenders can charge discharge fees to cover the administrative costs and there are other Government charges which may apply.)

• With a variable rate loan, your repayments will increase with interest rate rises. You should consider how interest rate rises may impact your future financial situation and goals. Use our handy online calculators to help you plan and budget for possible rate rises.
• A basic or ‘no frills’ variable rate loan is one which lacks additional features such as an offset account and as a result, attracts a lower interest rate and fees. This type of home loan is useful for first home buyers who want to keep costs down and those who prefer a simple loan product without all the bells and whistles.
• A standard variable rate loan is suited to borrowers who prefer more flexibility and want the ability to redraw from the loan or place any extra funds in an offset account. These extra features are usually part of a Package Home Loan that includes offset accounts, a credit card and other associated facilities and discounts, for an annual fee.

 A Home Loan Package is an all-inclusive suite of products attached to a home loan. For an annual fee, you can get benefits such a discount on the variable interest rate, fee waivers for transaction or offset accounts, a credit card with an annual fee waiver and discounts on insurance products. 

Things to consider:

• To be eligible for a Home Loan Package, a minimum loan amount will be required (usually $250,000 or more).
• An annual package fee will apply and can range from $350 to $750 depending on the type of package and the lender.
• A credit card (with no annual fee) is usually part of the package. You may not require this card and the credit card limit may impact your borrowing capacity. It could also result in you incurring more debt at credit card interest rates.
• Talk with us and we’ll help you consider the pros and cons of each product, as well as the overall costs and savings, before choosing the option that suits your needs.

A fixed-rate home loan allows you to set your interest rate for a period of time. This is usually in

the range of one to five years. Sometimes, you can arrange to secure your interest rate for longer.

Fixing your interest rate can be a suitable option for some people, however, you should be aware of the following:

• Fixed-rate home loans often have higher interest rates than variable-usually rate home loans. Often, the longer the fixed rate term, the higher the interest rate is likely to be. For example, a five-year fixed loan will usually, however, have a higher rate than a three-year fixed loan.
• If interest rates do not rise, or if they fall during your fixed rate period, you could then pay more interest fixed-rate than you would if you had a variable rate home loan.

• During times of low interest rates, locking in a fixed rate could work to your advantage, because you can retain a low rate for a fixed term even if the rates rise steeply. Depending on the lender and the current interest rate, this could potentially lower your repayments and the total interest paid over the loan term.
• You know exactly how much your repayments will be during your fixed rate term, which can make budgeting easier

• Less Flexibility. Fixed-rate loans usually do not have the same flexibility that a variable rate loan provides. For example, you may not be able to make extra repayments and un turn redraw the extra amount paid into the loan. Some lenders do allow extra repayments to be made but will restrict the extra amount that can be paid during the fixed term or on an annual basis.
• No offset facilities. Most lenders will not allow you to have an offset account with a fixed rate loan so there is no opportunity to save on interest. Where offset facilities are available, they will usually only be available on a partial basis, with a 100% offset account being available through some lenders only.
• Break costs. The decision to break your fixed rate loan is entirely up to you however a break cost may be applicable. Break costs may apply if:

                           -  you want to exit before the end of the fixed term.

                           -  you prepay part of or your entire loan before the end of your fixed rate period

                           -  you switch to another product, interest rate or payment type before the end of your  

                               fixed-rate period.

                           -  you want to end the loan as part of selling the property.

• Calculating break costs. Each bank uses a different formula to work out the break costs, so it’s worth finding out how your lender calculates this fee as the formula is complex. However, in general terms if the current wholesale interest rate for the remaining part of the fixed interest term is lower than the original wholesale interest rate when the fixed interest rate period started, then a Break Cost will be charged.

The rate is usually not set until settlement. Some lenders will apply the fixed rate at the loan settlement date or the date the fixed rate period commences while others will apply the fixed rate available at the time you sign your letter of offer. This may or may not work in your favour. There may be an option to lock in your fixed rate (see below), however there might be a fee from the lender for this.

• Your decision whether to fix the interest rate on your loan should be based on your own circumstances, with your future in mind. Certainty of repayments is the best reason to fix your rate—they seldom help to beat rate rises over time.

If variable rates increase, you may pay more interest than if you fix your rate. It will depend on the size of the increase(s), how far into the term the increase(s) occurs, and how long you hold the loan after the increase(s) occur.

If variable rates stay flat or decrease, you will pay less interest than if you fix your rate. This is on the basis that your fixed rate is higher than the variable rate over the same period.

Some lenders will provide you with the option of locking in the fixed rate prior to settlement occurring. This is referred to as “Rate Lock” and will involve paying a rate lock fee which will usually be calculated as a percentage of the loan amount.

This fee can be a significant amount, although some lenders will not charge a fee or may waive it. If you choose this option, then you can proceed with certainty and complete peace of mind that the decision to fix your interest rate will not move between when the rate lock is effective and the rate that would be applicable on the day of settlement.

Most people who elect to Rate Lock do so at the time the application is submitted. It can be done later in the process— however, the lender can announce a rate increase at any time before settlement and once announced the opportunity to lock in the previous rate passes. A “wait and see” approach carries with it the risk of missing out on the lowest fixed rate that could have been obtained.

If you decide to Rate Lock, make a note of the expiry date, as it will usually be in place for 90 days. If your settlement still hasn’t occurred when it expires, it will need to be renewed (including paying another fee) for it to remain in place. This can be an important consideration if you have negotiated a long settlement.

A split rate home loan is a loan that allows you to split your home loan into multiple loan accounts that attract different interest rates.

A common example is to split your home loan to obtain a variable interest rate on one portion of the loan and a fixed rate on the other.

For example, if you require a loan amount of $350,000, you can decide to split your loan with $250,000 at a variable interest rate and the remaining $100,000 at a fixed interest rate. You will have the flexibility a variable rate loan offers, while still enjoying the interest rate certainty of a fixed rate on a portion of the loan.

• Split loans are a comfortable compromise that allows you to enjoy the benefits of both types of mortgages—variable and fixed—at the same time.
• The fixed rate portion of a split loan offers you some security and protection against sudden interest rate rises.
• The variable rate portion of a split loan provides flexibility and allows you to take advantage of decreases in interest rates.
• You can often make extra repayments on the variable portion of the home loan, which could help you pay it off sooner.
• The variable portion can have additional benefits such as an offset account or a redraw facility.
• There are no restrictions on how you split your home loan. For example, you can split your home loan down the middle 50/50, or you can split it 30% variable and 70% fixed. However, most lenders only allow two splits.

• You may miss out on potential savings on the fixed portion of your loan if interest rates should fall.
• You will pay more on the variable portion of your loan if interest rates rise.
• There may be additional costs associated with this type of loan.
• If you need to pay out the loan early within the fixed term, early repayment costs could be charged.
• Consider where you want to be in the next five years. This will help you choose a loan with features suitable to your goals and objectives.
• Break costs. The fixed rate portion of your split loan may be subject to break costs if:

                                 -  you want to exit before the end of the fixed term.

                                 -  you prepay part of or your entire loan before the end of your fixed rate period

                                 -  you switch to another product, interest rate or payment type before the end of your 

                                     fixd rate period. 

                                 -  break costs also apply if you want to end the loan as part of selling the property.

• Calculating break costs. Each bank uses a different formula to work out its break costs, so it’s worth finding out how your lender calculates this fee as the formula is complex. However, in general terms if the current wholesale interest rate for the remaining part of the fixed interest term is lower than the original wholesale interest rate when the fixed interest rate period started, then a Break Cost will be charged.