Fixed vs Variable: Which Rate is Right for You?

One of the most critical decisions when taking out a home loan is choosing between fixed and variable interest rates. This choice will significantly impact your finances over the life of your loan, affecting everything from monthly repayments to long-term savings.

What is a Fixed Rate Loan?

A fixed rate home loan locks in your interest rate for a predetermined period, typically ranging from one to five years. During this fixed period, your interest rate remains unchanged regardless of what happens in the broader economy.

Key Features of Fixed Rate Loans:

Certainty and Stability: Your monthly repayments stay exactly the same throughout the fixed period, making it easier to budget and plan your finances. Protection from Rate Rises: If interest rates increase during your fixed period, you continue paying the lower rate you locked in. This protection can save you thousands of dollars. Peace of Mind: For many borrowers, especially first home buyers, the psychological benefit of knowing your rate cannot increase provides significant peace of mind.

Limitations of Fixed Rate Loans:

Missing Out on Rate Decreases: If interest rates fall, you are stuck paying the higher fixed rate until your fixed term ends. Break Costs Can Be Substantial: If you need to exit your fixed rate loan early, you may face significant break costs running into tens of thousands of dollars. Limited Flexibility: Fixed rate loans typically restrict how much extra you can repay. Many lenders cap additional repayments at $10,000-$30,000 per year. Fewer Features: Fixed rate products usually come with fewer features. You may not have access to offset accounts or redraw facilities.

What is a Variable Rate Loan?

Variable rate home loans have interest rates that can change at any time, typically moving in response to Reserve Bank of Australia (RBA) cash rate changes.

Key Features of Variable Rate Loans:

Benefit from Rate Decreases: When interest rates fall, your rate should decrease too, meaning your monthly repayments go down. Maximum Flexibility: Variable loans typically allow unlimited additional repayments, giving you freedom to pay off your loan as quickly as your finances permit. Full-Featured Products: Variable rate loans often come with valuable features like 100% offset accounts and redraw facilities. No Break Fees: You can refinance, switch lenders, or pay off your loan completely without penalty.

Limitations of Variable Rate Loans:

Repayment Uncertainty: Your monthly repayments can increase with little notice. Budgeting Challenges: The unpredictability makes long-term financial planning more difficult.

Split Loans: Best of Both Worlds

Many Australian borrowers choose a split loan strategy, dividing their loan between fixed and variable portions. Common Split Strategies:

• 50/50 Split: Balanced approach with half protection, half flexibility
• 70/30 Split (Fixed/Variable): More certainty with some flexibility
• 30/70 Split (Fixed/Variable): Emphasizes flexibility with some protection

Making Your Decision

Consider fixing if:

You have a tight budget with no room for increases

You value stability and certainty

Current rates are at historic lows

Consider variable if:

You have a comfortable buffer in your budget

You want maximum flexibility and features like offset accounts

The best choice depends on your individual circumstances, risk tolerance, and financial goals.