Find out which interest rate type suits you so you save the most.
There are two types of home loan interest rate, variable and fixed. In short:
- Variable interest rates can change at any time (up or down) and tend to offer slightly lower rates and more repayment flexibility.
- Fixed interest rates cannot go up (or down) for the fixed period (usually 1-5 years) but often have more fees and less flexibility.
Both rate types have strengths and weaknesses and it all depends on your needs as a borrower. It's usually a trade-off between flexibility on the one hand and certainty on the other.
What you need to know about variable interest rates
- 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. 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.
- 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.
What you need to know about fixed interest rates
- 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. If rates fall across the market, you could be stuck on a much higher rate than the industry average.
- 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