Fixed vs. variable home loans

Choosing between a fixed or variable rate home loan

When you’re looking to buy a home, one of the bigger decisions you’ll face is choosing between a fixed or variable rate home loan. This is because a selecting a loan isn’t only about the interest rates, but also understanding how these loans align with your overarching financial goals, the loan features you seek and your overall risk tolerance. By weighing your options carefully, you can find the loan that best suits your needs and budget. In this article, we’ll outline the pros and cons of each loan type, supporting you to make an informed decision about which path to take for your mortgage.

Pros and cons of a fixed rate home loan

Let’s break down the benefits and considerations of a fixed rate home loan, so you can better understand if this option meets your goals.

Advantages

• Your interest rate stays the same throughout the fixed term. This means your monthly repayments remain constant, helping you budget and plan your finances with confidence (until the end of the fixed rate period).
• If interest rates rise during your fixed term, you’ll be protected from any increases in your loan repayments. This can provide you peace of mind, especially in a fluctuating economic climate.
• These loans are generally straightforward; you know exactly what you’re getting into, which can further help simplify the home buying process. Customers can also benefit from securing their fixed interest rate during their home lending application with a Rate Lock. This provides certainty of knowing what the fixed interest will be at loan drawdown.

Limitations

• You won’t benefit from any variable interest rate reductions if they occur within the fixed term.
• You won’t be able to create an offset account to help reduce your interest rate.
• Break costs or economic costs may be charged on a fixed rate loan. This usually happens when you make additional repayments (over a certain amount) on the loan, switch to a different product, repay the loan in part or in full before the end of the fixed rate term and when the total amount owing is due because the loan is in default.
• Redraw is not available on a fixed rate home loan. Usually, you’ll need to wait until the end of your fixed term to redraw.

If you’ve made the decision to fix the interest on an existing variable home loan, it’s a simple update to make. Read our step-by-step instructions on fixing the interest on your home loan.

Also learn what you can do if your fixed interest rate period expires.

Pros and cons of a variable rate home loan

With interest rates that fluctuate with the market, variable rate home loans offer a mix of advantages and limitations.

Advantages

• Variable rate loans may start with lower interest rates compared to fixed rate loans, which could translate to lower monthly repayments.
• These loans generally offer more flexibility with 100 per cent offset available.
• You can make extra repayments and pay off your loan early. This means you could save a fair bit on interest over the life of the loan.
• If the market interest rate drops, you’ll benefit from paying less in loan repayments, and could use the money to increase your savings or invest.

Limitations

• The biggest risk with a variable rate loan is that your interest rate and the subsequent monthly repayments could increase if the market rates go up or if your lender decides to increase their rates. This unpredictability could make it challenging to budget.
• Uncertainty around repayments could make it difficult for some to plan and predict cash flow, over the long term.

If your variable loan rate increases, you can use your loan features such as offset or redraw to help ease cash flow concerns. Alternatively, creating money buckets in advance and staying disciplined with your savings can offer relief when market fluctuations occur.

While there are no right or wrong answers when it comes to choosing which home loan type to go with, it’s always best to know what your options are and what works best for your needs. Whether it’s a fixed rate, variable rate or combining the two in a split home loan, you can get started online with a home loan enquiry form.