Choosing between a fixed vs variable rate refinance is one of the most important decisions you will face when switching your mortgage. Both options have distinct advantages and drawbacks, and the right choice depends on your financial situation, risk tolerance, and outlook on interest rate movements. This guide compares both options so you can make a confident decision.
Understanding Fixed Rate Refinancing
A fixed rate refinance locks in your interest rate for a set period, typically one to five years. This means your repayments remain the same regardless of what happens to market interest rates during that period. Fixed rates provide certainty for budgeting and protect you from rate increases.
However, fixed rate loans usually come with restrictions. Most do not allow unlimited additional repayments, and the offset account functionality is often limited or unavailable. If you need to break the fixed term early due to selling or refinancing again, you may face substantial break costs that can negate any savings you gained from the lower rate.
Understanding Variable Rate Refinancing
A variable rate refinance means your interest rate moves up or down in response to market conditions and lender decisions. When rates fall, your repayments decrease, but when rates rise, your repayments increase. Variable rate loans typically offer greater flexibility, including full offset accounts, unlimited additional repayments, and redraw facilities.
The flexibility of a variable rate loan makes it easier to pay off your mortgage faster when you have extra funds available. For borrowers who value adaptability and are comfortable with some level of repayment uncertainty, a variable rate refinance often provides the best long-term outcome.
Fixed vs Variable Rate Refinance: Key Factors to Consider
When weighing a fixed vs variable rate refinance, consider the current interest rate environment and where rates are headed. If rates are low and expected to rise, locking in a fixed rate protects you from future increases. If rates are high and expected to fall, a variable rate allows you to benefit from reductions without the cost of breaking a fixed term.
Your personal circumstances also matter. If you have a tight budget and need predictable repayments, a fixed rate offers peace of mind. If you have surplus income and want the freedom to make extra payments or use an offset account to reduce interest, a variable rate may save you more over time.
The Split Loan Option: Combining Fixed and Variable
If you cannot decide between fixed and variable, a split loan lets you have both. You allocate a portion of your mortgage to a fixed rate and the remainder to a variable rate. This strategy provides some protection against rate rises while retaining partial flexibility for extra repayments and offset account benefits.
The ideal split ratio depends on your priorities. A common approach is to fix the portion that covers your essential repayment amount and leave the rest variable so you can direct any extra funds toward reducing the variable balance. Discuss your options with a mortgage broker to determine the split that best suits your financial goals.
Making Your Decision on Fixed vs Variable Rate Refinance
There is no universally correct answer when choosing between a fixed vs variable rate refinance. The best choice aligns with your financial goals, risk appetite, and the current economic environment. Review your budget, consider how long you plan to hold the loan, and evaluate the features you need most.
Speak with a mortgage broker who can model different scenarios based on your specific loan amount and financial situation. They can show you the projected costs and savings under various rate movements, helping you make a decision based on data rather than guesswork. Whatever you choose, ensure the loan supports your broader financial strategy.
Further Reading: Reserve Bank of Australia
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