Fixed or variable home loan

Typically, when obtaining a home loan, you have two options: a fixed interest rate or a variable interest rate.

A fixed interest rate home loan is one where the interest rate is set (i.e., fixed) for a specific duration, usually ranging from one to ten years. During this fixed period, both your interest rate and required repayments remain unchanged.

Conversely, a variable interest rate home loan can fluctuate at any time. Lenders have the ability to raise or lower the interest rate associated with the loan. The interest rate might shift in response to decisions by the Reserve Bank of Australia, among other factors. If interest rates rise, your minimum repayment amount will increase, and if interest rates drop, your repayment amount will decrease.

Which option is better for you? It largely depends on what you seek in a home loan. Here are some of the advantages and disadvantages of each.

Fixed or variable home loan?

Fixed rate home loans

A fixed rate home loan offers the reassurance that your repayment amount will remain consistent throughout the fixed term, which can be particularly helpful when adhering to a budget.

You typically have the option to select the duration for which you want to fix your interest rate. Depending on the lender, this period can extend up to 10 years. Usually, once the fixed term concludes, your loan will convert to a variable rate unless you opt to fix it again.

Although a fixed interest rate can shield you from potential interest rate increases, it also means you are committed to the fixed rate even if variable rates decrease during the fixed period.

Fixed rate home loans often offer fewer features compared to variable rate home loans. For instance, with a fixed rate loan, you might not have access to redraw during the fixed period.

It's crucial to understand that if you choose to pay off or refinance your home loan before the fixed term ends, you may incur break costs, which can be substantial.

Locking in the fixed rate

When applying for a home loan, you might come across an attractive fixed rate deal. However, this doesn't ensure that you'll receive that fixed interest rate upon settling on the property.

The fixed interest rate applicable to your loan will be the one offered by the lender on the settlement day, not at the loan application time.

You might have the option to secure the fixed interest rate before settlement by paying a Lock Rate Fee.

It's advisable to discuss with your lender whether locking in the fixed rate at the time of application is the best choice for you.

Once your fixed rate term begins, the rate will remain unchanged until the term concludes.

Variable rate home loans

A variable rate home loan usually provides more flexibility compared to a fixed rate home loan. It often includes various features that can assist you in adapting to changes in your life or financial situation.

For instance, many variable rate home loans allow you to make extra repayments to pay off your loan more quickly, and you can then withdraw these additional funds if needed in the future. Additionally, many variable rate home loans offer an offset account feature, which could help reduce the interest you pay.

A possible disadvantage of a variable rate home loan is that interest rates can fluctuate at any time. This means they can increase or decrease. It's wise to consider whether you can manage higher loan repayments if interest rates rise.

Can’t decide? Perhaps consider splitting the loan

If you're unsure about choosing between a fixed or variable home loan, you might consider dividing your loan between both options.

By splitting your home loan, you allocate a portion to a variable home loan and the remainder to a fixed home loan. You can opt for a 50:50, 60:40, or another ratio of your choice.

Consult your lender to explore your options.

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To sum up 

• When obtaining a home loan, you typically need to decide between a fixed interest rate and a variable interest rate

• A fixed interest rate home loan locks in your interest rate for a specified period, ensuring that your loan repayments stay consistent during that time

• With a variable interest rate home loan, the interest rate can fluctuate, meaning your repayment amount might rise if rates increase, or decrease if rates fall

• Each loan type has its advantages and disadvantages. Consider which option suits you best

• You also have the option to split your loan between the two types