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Difference Between Fixed and Variable Home Loans
Choosing a home loan generally means deciding between fixed and variable interest rates, unless you choose to hedge your bets by splitting your loan.
Fixed rate home loans offer security and stability, while variable rate home loans offer flexibility and a range of additional features.
There’s no one-size-fits-all solution here. The best home loan for you will have a lot to do with your personal circumstances and preferences.
If you’re weighing up between fixed and variable interest rates, here’s a quick rundown of the pros and cons of each.
What are the pros and cons of a fixed interest rate?
With a fixed rate home loan, your interest rate will be locked in for a specified period – typically one to five years. Knowing exactly what you need to pay may be helpful for planning and budgeting purposes.
A potential downside to fixed rate loans, however, is that they can be inflexible. For example, some institutions may prevent you from making extra repayments, or charge you a fee for doing so.
Similarly, if you suddenly find yourself flush with cash and able to pay off your loan sooner, or need to break the fixed interest period for any reason, you may have to pay a substantial break fee. For this reason, fixed home loans work best for people who can reasonably expect their circumstances to stay the same for the fixed term.
At the end of the fixed period you may have the option of committing to another fixed rate, reverting to variable interest, or refinancing.
What are the pros and cons of a variable interest rate?
With a variable interest rate home loan, interest rates can fluctuate based on the official cash rate set by the Reserve Bank of Australia (RBA) and your lender’s discretion.
There are generally two types of variable loans: standard and basic.
- Standard variable home loans. Standard features often include the flexibility to make extra repayments whenever you want, potentially helping you pay off the loan quicker. Other features such as redraw facilities and a line of credit may allow you to access any extra funds you’ve deposited into your home loan to meet your financial obligations outside of the home loan.
- Basic variable home loans. Although they come with fewer features, basic variable home loans generally offer lower rates. This can make them an appealing option for people focused on keeping costs down.
To get an estimate of the overall cost of a fixed versus variable home loan, try iSelect’s handy Loan Comparison Calculator. Or, see how much time and money you could save by making regular additional contributions to your home loan with the Extra Repayments Calculator.
What are the pros and cons of a split loan?
Rather than choosing between a fixed or variable loan, some people decide to hedge their bets and split their home loan. This means they pay a fixed rate on one portion of the loan, and a variable rate on the other portion.
A split loan offers a bit more certainty over repayments than a fully variable rate, while still allowing you to take advantage of any interest rate cuts.
As you can see, fixed and variable home loans both have their benefits. The advice and up-to-the-minute market knowledge of a qualified mortgage broker can be invaluable when it comes to deciding on the best home loan for your needs and budget.
iSelect is not currently offering a Home Loan comparison.