Fixed or Variable Home Loan Rates: What Works For You?

The main difference between a fixed rate and a variable rate is how the interest rate is set and whether it can change over the life of the loan.

Deciding on a mortgage takes plenty of time, research and effort. One of the most important choices you will face is whether to opt for a fixed or variable interest rate on your home loan. But how do these differ, and how can they affect your home loan?

Fixed-Rate Loans

A fixed interest rate home loan means the interest rate is locked in (hence the term fixed) for a certain period, typically between one and ten years. During this time, your interest rate and required repayments will remain the same, providing you with stability and predictability.

This means your repayments will stay the same during the fixed rate period, regardless of whether interest rates rise or fall. Fixed rates offer less flexibility on your ability as a borrower. Significant break fees may apply if you decide to refinance, sell your property, or pay off your loan in full before the fixed term expires.

Variable-Rate Loans

A variable-rate home loan has an interest rate that can change over time, usually in response to changes in the Reserve Bank of Australia’s official cash rate or at the lender’s discretion. This means that your repayments may go up or down over the life of the loan, making it harder to budget for the future.

Because variable interest rates can change at any time, it can be challenging for borrowers to predict their cash flow over the long term accurately. As a result, borrowers with a variable rate loan may need to be more flexible in managing their finances. However, utilizing loan features such as offsets and redraw facilities can help alleviate cash flow concerns in unexpected events.

Split-Rate Loans

A split home loan involves dividing a mortgage into multiple parts, allowing borrowers to allocate a portion of the loan to a fixed interest rate and the remaining amount to a variable interest rate.

Typical split loan ratios include 50:50, 70:30, or 60:40, which allocate funds between fixed and variable interest rates. The decision of which ratio to choose often depends on a borrower’s willingness to take on the risk of potential cash rate fluctuations. Lenders typically offer competitive interest rates for various fixed and variable loan options.

Can I Switch From Fixed to Variable Rates and Vice Versa?

Throughout the term of your home loan, you may have the option to change your interest rate structure, including switching between a fixed or variable interest rate or opting for a split-rate home loan. This can provide some of the stability of a fixed-rate loan with the flexibility of a variable-rate loan.

Choosing between a fixed or variable-rate mortgage requires careful consideration of your financial situation and future goals. Ultimately, the decision should be based on your individual needs and circumstances.