Sarah: What is the difference between fixed and variable rate home loans and what options
are out there?
In this video, we're going to talk about three options and what might best suit your situation.
Sarah: Hi guys, it's Sarah.
Here at Lendi we've helped thousands of Australians compare fixed and variable rate home loans
and help them understand what might be best to suit their needs.
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and don't forget to hit the bell to be notified when we upload new videos.
By the end of our video today, you should have a great understanding of the difference
between fixed and variable rate home loans and be able to make the right decision.
Sarah: So number one, what is a fixed rate home loan?
A fixed rate home loan means that your interest rate is fixed for a certain period of time
and your repayments won't change during that period.
The fixed rate will typically last anywhere between one to five years, and then will revert
to the standard variable rate at the end of that period.
Now make sure you check what that standard variable rate will be as many lenders will
entice you in with a very low interest rate and then it will revert to a very high rate
at the end of the fixed period.
Sarah: So, what are the pros of a fixed rate?
Repayments are predictable, meaning you'll know how much you need to pay at the end of
every month or fortnight.
This can be useful for first home buyers or anyone that's following a strict budget.
If interest rates rise, your repayments will not be affected.
So, what are the cons of a fixed interest rate?
If interest rates drop, you will not benefit from the rate decrease.
Sarah: Break or exit fees will usually apply if you choose to refinance your loan during
the fixed period.
Many fixed rate loans offer limited access to offset or redraw facilities.
Some lenders will not allow you to make extra repayments, and if they do, it's generally
capped at about $10,000 per year.
So, that's fixed rates.
Sarah: Number two, variable rate loans.
What is a variable rate loan?
A variable rate loan means that your interest rate can fluctuate depending on economics
or market conditions.
So, why do interest rates fluctuate?
Interest rates can vary in accordance with the Reserve Bank of Australia's cash rate
changes.
Recently some lenders have increased their rates out of cycle due to funding costs, which
is really just the cost of borrowing money.
Sarah: So, what are the different types of variable rate loans?
There's a standard variable rate which offers flexibility and generally comes with additional
features such as offset accounts, redraw facilities, and the ability to split your loan.
Or a basic variable loan, which generally is a lower interest rate, but it doesn't come with the
additional features such as the offset account or a redraw facility.
Sarah: Now, what are the benefits of a variable rate?
If interest rates fall, you'll get the benefit of a reduced monthly repayment, which will
also reduce the total amount you pay back to the bank over the life of the loan.
The flexibility to make additional repayments if utilised correctly, you'll pay off your
loan faster and again, ultimately reduce the amount of interest you pay back to the lender.
You can reduce the amount of interest that you pay back over the life of the loan by
utilising your offset and your redraw facilities.
There is generally less hassle switching your variable rate loan as most lenders do not
have break or exit fees for variable rate loans.
Sarah: So, what are the drawbacks of a variable rate loan?
If interest rates rise, yours will too, meaning that your repayment will also increase and
it can be a little bit harder to budget.
Using the link in the description, Lendi's home loan calculator can help you budget and
prepare if rates do rise.
Sarah: Now, before we move to an alternate option, we have a question for you.
Most Australians don't know what their interest rate is.
If you don't know or maybe you do know, leave it in the comment section below.
Now that's fixed and variable.
What other options are there?
Let's talk about a split rate loan, option three.
Split loans offer the best of both worlds.
You can have one portion on variable and one on fixed.
It's important to note that split loans don't need to be an equal 50-50 divide.
Sarah: One part of your loan will remain fixed and unchanged if interest rates rise or fall,
the other part will be affected.
If rates go up, your payments won't change for the fixed portion of your loan.
You'll have flexibility to make additional repayments on the variable portion of your loan
and the ability to connect an offset account or a redraw facility to the variable
portion of your loan.
Sarah: Are there any disadvantages of a split rate loan?
Some lenders may restrict the ability to pay off your loan sooner.
The fixed portion can come with fees if you make additional repayments.
Do you currently have a fixed loan?
If you do, it's very likely you'll have to pay an exit fee or a break cost if you're
wanting to split your loan.
If interest rates do decrease, you'll only get that benefit for the variable portion
of your loan.
The fixed portion will remain unchanged.
If you're not sure, you can spend hours comparing your options online or to save time, you could
jump online to Lendi.com.au and compare over 35 lenders to find the best option for you
or if you'd like to have a chat with one of our Home Loan Specialists, you can choose
a time that suits you best using the link in the description.
Sarah: So, that's it guys.
Everything you need to know about variable, fixed or split rate home loans.
If you found this video helpful, please give us a thumbs up, and if you have any questions,
you can leave them in the comments below.
If you're looking for more tips, you can also join our private Facebook group, Home Loan Hacks Australia,
where we can answer any questions you have about all things home loans.
Sarah: Finally, if you're wanting any more information on other relevant home loan topics
such as how to estimate the value of your home, you can check out our video here
or if you're wanting to find out the hidden fees of home loans, you can check out our video here
Thanks guys.
See you next time.