Find out which interest rate type suits you so you save the most.
Variable rate mortgages are the most popular products in Australia, but fixed rate loans still take up a sizeable chunk of the market. There's no definite answer about which rate is better. It depends on your needs and financial plans. Variable rate loans usually offer lower rates plus more features and flexibility. Fixed rate loans give you greater certainty because your repayments won't change for the fixed period. They tend to have higher fees for exiting or switching and offer less flexibility in how you repay the loan. It's a trade-off between flexibility on the one hand and certainty on the other.
Let's take a greater look at the differences between the two.
The benefits and risks of variable rate loans
- Flexibility and features. Many variable rate loans come with flexible repayment options and don't charge you for making extra repayments. This lets you repay your mortgage faster and without penalty or in ways that suit you better. Variable rate loans are more likely to offer redraw facilities and very useful features like offset accounts.
- Easier to switch. It's easier to refinance a variable rate loan, so if you're likely to switch mortgages in the future this is something to consider. Some people refinance to get a lower interest rate or unlock more features, while others switch loans when selling a property or turning their residence into an investment property.
- Lower in fees (generally). Competitive variable loans often come with lower fees than their fixed rate equivalents. This can save you money upfront (application fees), over the course of the loan (ongoing fees) or when refinancing (exit or switching fees).
- Rates may fall. If the Reserve Bank lowers the cash rate or your lender decides to cut rates in a competitive market, you'll benefit by getting a lower rate. Fixed rate borrowers are locked in and won't see such a benefit until their fixed period ends.
- Rates may rise. The biggest risk with a variable rate loan is that your rate can rise at any time. This can catch you by surprise and will result in higher repayments. If you're not prepared this could be a big financial blow and it isn't something you can easily predict.
- Features you don't need. Not all features are useful ones. If you don't need all the options and flexibility of a variable rate you might be better off with a fixed rate, if you can find one with a reasonably low rate.
- You need to pay more attention. Potential fluctuations mean variable mortgage holders need to pay more attention to their loan. For time poor homeowners this can be a burden in itself.
The benefits and risks of fixed rate loans
- Rates may rise. If rates start to rise and you've fixed your repayments, you'll come out ahead. This is the biggest potential benefit to fixing your rate, but it is a gamble.
- Easier to budget. Knowing exactly what your repayments are for one, two or possibly even five years can be very helpful. You won't get caught off-guard by increased repayments and you can organise your finances with more certainty. For some people this is worth paying a little extra.
- Simplicity. A fixed rate loan is just easier. As long as your rate is set in stone you don't have to worry about it too much.
- Rates may fall. No one wants to get stuck with higher repayments while others are getting big discounts.
- Fewer features. An offset account can help you repay your loan faster while paying less interest. But most fixed mortgages don't offer this feature. Less flexibility is another drawback.
- Harder to refinance. Fixed rate loans usually have higher exit or switching fees, making refinancing more costly. This means you should calculate the potential savings of refinancing and balance it against the cost of fees.
Watch: fixed and variable rates explained
Split rate loans: the best of both worlds
A split rate home loan is a total loan amount divided into two custom portions; one locked into a fixed rate and the other variable.
If you really like the idea of fixing your interest rate, but you don't want to lose the flexible features available on your variable loan, you can choose to split your home loan.
Compare fixed, variable and split rate loans