What I am saying was that in the 80s the word 'faggot' was pretty commonplace as an insult and therefore seemed to be an acceptable word to use in that context within general society.
As I said before, I am not a huge fan of Christmas songs but I do clearly remember when I first became aware of this song which was in a city centre pub in Nottingham when the drunk, mainly men sang along in glee with this tune, giving particular emphasis to that section of the song. Not with any great understanding of the lyrics, just a joy at being allowed to use language of that sort, that may, or may not, have expressed some deeper feelings on their part. That the word may have been "acceptable" in parts of society doesn't negate my feelings about the use of the word, and the feelings of many others who have had that word used against them. For a song to be as good a song as you seem to be arguing it is, it would not provoke such feelings in an at that time marginalised group.
I agree with Jeremyp here, he was looking for a rhyme either for maggot or faggot and this is what we got.
As you point out it doesn't work in the context of the song and signifies a bit of lazy lyric writing at the least and at worst an unthinking attitude toward certain groups in society.
Either way, they are not signifiers of a great or even a good song.