For many homeowners looking to break into the home loan market, it can be challenging to determine the right home loan option that best suits their financial position. Do you go for a fixed rate or a variable rate?
Here we'll navigate fixed- and variable-rate home loans, along with their pros and cons, to help you determine which type of home loan may be right for you.
What is a fixed-rate home loan?
As the name suggests, fixed-rate home loans offer the security of your interest rate staying 'fixed' throughout the term. This provides a sense of stability and enables you to budget accordingly, knowing that your repayments will stay the same.
Typically, with a fixed-rate loan, you:
-
Have the same repayments over the fixed term period
-
Can usually make up to $10,000 additional repayments per year (depending on the lender), but probably can't make unlimited additional repayments.
-
Are less likely to find other features, such as an offset account.
-
Face break fees if you refinance within the fixed rate period.
Here are some fixed-rate home loans available for residential borrowers:
Lender Home Loan Interest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees Max LVR Lump Sum Repayment Extra Repayments Split Loan Option Tags Features Link Compare Promoted Product Disclosure
Disclosure
What is a variable-rate home loan?
A variable-rate home loan is one where the interest rate moves in line with market conditions. This means your rate - and therefore your repayments - can rise or fall at any point during your loan term.
When interest rates go up, lenders usually increase the minimum required repayment to keep the loan on track. However, if you've been paying more than the minimum, some lenders may leave your repayment amount unchanged.
In that case, a larger share of your payment goes toward covering interest rather than reducing the principal, which can slow down progress and effectively extend the life of your loan.
Variable-rate loans are popular for the flexibility they provide, but they offer less certainty than fixed-rate options.
Typically, with a variable-rate loan, you:
-
Have access to offset accounts and redraw facilities. Many variable loans include redraw as standard and offer optional offset accounts (usually at an extra cost).
-
Can monitor the cash rate and market conditions, then switch lenders or products if your repayments become too high.
-
May opt for basic variable loans, which have lower establishment and ongoing fees in exchange for fewer features.
-
Can make unlimited additional repayments and even pay off your mortgage early, usually without penalty.
Check out these variable-rate owner-occupier home loans:
Lender Home Loan Interest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees Max LVR Lump Sum Repayment Extra Repayments Split Loan Option Tags Features Link Compare Promoted Product Disclosure
Disclosure
Choosing between a fixed and a variable home loan
Deciding between a fixed- and variable-rate home loan comes down to finding the right balance between certainty, flexibility, and cost based on your financial position.
If you're looking for owner-occupier loans because you're planning to move into your forever home, then you might want the flexibility to pay your mortgage off a few years earlier.
On the other hand, if you're looking for investor loans for a buy-to-let venture, then you may want more predictability so you can budget and project your cash flow and profits more accurately. Everyone's different.
Can I split between a fixed and variable rate?
Yes. If you are not completely sold on one particular home loan option, you can split your loan between fixed and variable. This allows you to lock in a fixed interest rate on a portion of your loan, while the remainder is on a variable rate. This can help you minimise the risks associated with interest rate movements.
At the end of the fixed rate period, you can either refix that portion again for another term or simply let it revert to a variable interest rate.
Keep in mind: The revert rate offered by your lender may be higher than the standard variable rate you were already paying on the other portion of the loan. Always check what rate applies before deciding to refix or switch.
See Also: Split Loan Calculator
Pros and cons of fixed-rate home loans
Pros
-
Repayment certainty - Your repayments stay the same for the fixed term, making it easier to budget without worrying about rate hikes or market volatility.
-
Protection in rising-rate environments - If interest rates go up, your fixed rate shields you from higher repayments during the fixed term.
Cons
-
Less flexibility - If interest rates fall, you won't benefit from lower repayments since your rate is locked in.
-
Break costs - Exiting your fixed loan early (e.g. to refinance or sell your property) can attract significant break fees, which are often much higher than variable loan exit fees.
-
Feature limitations - Many fixed loans restrict or cap extra repayments and may not offer full offset accounts.
Pros and cons of variable-rate home loans
Pros
-
Flexibility - Variable loans often allow unlimited extra repayments, redraw facilities, and access to offset accounts, giving borrowers more control.
-
Easier to refinance - While lenders may charge a discharge or exit fee, these are generally far lower than fixed loan break costs.
-
Savings potential - If rates fall, your repayments may decrease. Alternatively, if you keep repayments at the same level, more goes toward reducing the principal, helping you pay off your loan faster.
Cons
-
Exposure to rate rises - If interest rates increase, so will your repayments, which can add thousands in extra costs over the life of the loan.
-
Cash flow uncertainty - Because rates can move at any time (depending on lender decisions and the RBA cash rate), budgeting is less predictable compared to a fixed loan.
Which home loan interest type should you choose?
A home loan is a long-term commitment, and like all things in life, things can change over time. This could mean changes in your personal life or financial circumstances that require you to re-evaluate your mortgage.
It's important to review the interest rate you're paying at various points over the life of your loan to ensure it remains competitive. Many lenders reserve their best rates for new customers, meaning existing borrowers can end up on a higher "loyalty tax" rate if they don't renegotiate or refinance.
Checking your loan also gives you the chance to take advantage of useful features such as offset accounts or redraw facilities, which can help reduce interest costs and increase flexibility if they're available with your loan.
Photo by Towfiqu Barbhuiya on Unsplash
