Choosing the Right Home Loan: Variable, Fixed, or Blended?
One of the biggest decisions you’ll make when taking out a home loan is choosing the right type of interest rate structure. Choosing the right loan type depends on your financial situation, your future plans, and how comfortable you are with potential changes in your repayments. Here’s a look at variable, fixed, and blended (or split) home loans, to help you understand which option might suit you best.
Variable Rate Loans
A variable rate loan is one where the interest rate can move up or down over the life of the loan, in line with changes made by the lender in response to market conditions.
Pros:
- Often comes with more flexible features, such as offset accounts and redraw facilities
- You can usually make extra repayments without penalty
- You’ll benefit if rates fall during your loan term
Cons:
- Your repayments can increase if rates rise, which can make budgeting harder
- Less certainty over what your repayments will look like in the future
Best for: Borrowers who want flexibility and access to features like offset accounts, and who can comfortably manage changes in their repayments if rates move.
Fixed Rate Loans
A fixed rate loan locks in your interest rate for a set period, commonly one to five years, regardless of what happens to interest rates during that time.
Pros:
- Repayments stay the same for the fixed period, making budgeting easier
- Protection against rate rises during the fixed term
Cons:
- You won’t benefit if interest rates fall during the fixed period
- Fixed loans often have fewer features and can come with break costs if you pay out the loan early or make large extra repayments
- At the end of the fixed period, you’ll move to a variable rate (or need to refix), which may be different from what you’re paying now
Best for: Borrowers who value certainty and want to know exactly what their repayments will be for a set period of time.
Blended or Split Loans
A blended, or split, loan combines both fixed and variable portions within a single loan, allowing you to enjoy the benefits of both structures.
Pros:
- Provides a balance of certainty (on the fixed portion) and flexibility (on the variable portion)
- You can still access features like offset accounts on the variable portion
- Reduces your exposure to rate changes compared to a fully variable loan, while keeping some flexibility compared to a fully fixed loan
Cons:
- Can be more complex to manage, with two portions to keep track of
- You’ll still be exposed to some rate movement on the variable portion
Best for: Borrowers who want to hedge their bets, gaining some certainty over part of their loan while retaining flexibility on the rest.
Choosing the right loan type depends on your financial situation, your future plans, and how comfortable you are with potential changes in your repayments. There’s no one-size-fits-all answer, which is why it’s worth talking through your options with a broker who can look at your full picture.
Not Sure Which Loan Type Is Right for You?
If you’d like help weighing up variable, fixed, or blended options for your situation, get in touch at jane@justrightlending.com.au.