The interest rates that are offered with home loans will greatly affect how much you will pay over the life of your mortgage. But there are different types of interest rates available. Understanding how they work will help you pick the right home loan for you.
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What home loan rates are available?
Home loans come with two types of interest rates: fixed and variable. Many loans also offer the option of splitting between the two. Here's how they work:
Fixed: Locking in your interest rate
Fixed rate home loans allow you to lock in an interest rate for a set term, generally between 1 and 5 years. This means your rate and repayments won't change over the course of the fixed term.
Features of a fixed rate home loan
Fixed rate loans generally have few features. But while these loans are generally less flexible, they offer you stability. By knowing what your repayments are going to be you are able to budget accordingly and not be disadvantaged when the interest rates rise.
Who is suited to a fixed rate?
These loans are suited to people who would like some stability in their repayments, or who are working on a budget and don’t have much disposable income.
Variable: Floating and adjustable
Variable interest rates can change over time due to a variety of factors, including the Reserve Bank official cash rate, bank funding costs and market demand. If interest rates are lowered your repayments will drop, but if they rise so will your repayments. These loans will generally come with more features and flexibility than fixed rate home loans, including the option to make unlimited additional repayments.
Features of a variable rate home loan
The main benefit of the variable interest rate is that the loans will have a variety of features. The loan can offer features such as interest offset accounts, the ability to make free additional repayments, the ability to make free withdrawals and many more.
Who is suited to a variable rate?
Variable interest rate loans are suited to people who would like added features and flexibility in their home loan.
Split: Both fixed and variable
Split loans allow you to set a portion of your home loan on a fixed rate and a portion on a variable rate. This offers you a measure of certainty, as rate rises won't affect you as severely. It also allows you to access some of the features common to variable rate home loans.
Features of a split rate home loan
Split rate home loans offer features of both fixed and variable rate home loans. This can include offset accounts, free redraw and the ability to make additional repayments.
Who is suited to a split rate?
Split rate products suit borrowers who want to combine the features and flexibility of a variable rate home loan with the certainty of a fixed rate.
When to fix your home loan rate
It's more than the interest rate
Although interest rates are important when considering home loans, they may not be the most important factor. Consider a loan's features and how they may suit your borrowing needs. You should also take into account fees, as they can erode the savings you make on a sharp interest rate.
- Read, talk and make inquiries as to what level of flexibility you are looking for in a home loan.
- What do you intend borrowing money for in the future? e.g. when will you need a new car? when will the home need repairs or how long before you will need that extra room to be built on?
- How vulnerable do you feel you are to any upward movements in the interest rate?
- Determine your other savings intentions, such as holidays or education for your children.
- Determine how much money you feel you will be able to keep in your bank account every month.
- Make sure you are clear on whether you intend to make minimum payments each month of if you intend to pay your mortgage off as fast as possible.
- List all the changes you expect you will experience in your income over the first five years of your home loan.