Fixed or Variable Home Loans

Fixed vs Variable Home Loans: A Simple Guide for Australian Homeowners

When it comes to home loans in Australia, there are two main types: fixed and variable. Understanding the difference between them can help you make an informed decision about which option is best for your financial situation.

What’s the Difference?

A fixed home loan has an interest rate that stays the same for a set period, typically one to five years, but it can be up to ten years. This means your monthly repayments will stay the same, which can be helpful for budgeting.

A variable home loan has an interest rate that can change over time. This rate can increase or decrease based on decisions made by the Reserve Bank of Australia (RBA) and the lender’s pricing strategy. The flexibility of a variable loan can be an advantage, but it also means your repayments could go up or down.

How Do They Work?

Variable Home Loans

The interest rate on a variable loan moves according to the RBA’s decisions, which affect how much banks charge for borrowing money. Lenders can also change their rates at any time depending on their pricing needs.

Variable home loans often come with extra features like offset accounts and redraw facilities, which can help you save money and manage your finances more easily.

Fixed Home Loans

The interest rate on a fixed loan is locked in for a specific period, offering certainty about how much you will pay. This is helpful if you want to plan your budget without worrying about rate changes. However, if you want to exit the loan early or make significant changes, you may have to pay a break cost.

Some fixed loans offer a rate lock feature, which allows you to secure the interest rate before the loan is settled, providing even more certainty.

Who is it Right For?

Variable Home Loans

A variable home loan might be suitable for you if you can handle changes in interest rates. This option is good for people who like the flexibility of features like offset accounts and redraw facilities, which can help reduce the amount of interest you pay.

Fixed Home Loans

A fixed loan is ideal if you want to lock in your interest rate for a set time. It can be perfect for people who prefer to know exactly how much they’ll be paying each month and who plan to stay in their home for a while. It’s also a good option if you’re on a strict budget and need to know your repayments won’t change.

Who Should Avoid Them?

Variable Home Loans

A variable loan might not be right for you if you need certainty with your repayments or if you can’t handle the possibility of interest rates going up. If you’re worried about your repayments increasing unexpectedly, a fixed loan might be a better option.

Fixed Home Loans

A fixed loan may not suit you if you think you might need to sell your property or make large repayments during the fixed term. The break costs can be quite high if you want to leave the loan early or make changes.

Final Thoughts

Choosing between a fixed or variable home loan comes down to your personal financial situation and preferences. If you want stability and easy budgeting, a fixed loan might be best for you. If you prefer flexibility and can manage the ups and downs of interest rates, a variable loan could be the right choice.

Remember, this is general advice only, and it’s important to speak to a financial expert before making any decisions about your mortgage.