Finder makes money from featured partners, but editorial opinions are our own.
Fixed versus variable home loan: Which is right for you?
Fixed rates offer more certainty because repayments don't change. But you can repay a variable rate faster and these loans tend to have more competitive interest rates.
There are two types of home loan interest rate, variable and fixed. They work slightly differently:
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.
Most Australian borrowers go for variable rate loans. Most of the time, these rates are lower than fixed rates (although in the last few years some fixed rates were lower). And their flexibility is important. Variable rate loans are much more likely to allow you to make extra repayments, letting you get out of debt faster. If you want to exit or refinance a fixed rate loan, you may get hit with some big fees.
But for a borrower who wants to know exactly what their repayments will be and lock in a good deal right now, fixing is definitely a strategy to consider.
Variable versus fixed interest rates: what's the difference?
Fixed rates
Variable rates
No change. Your interest rate won't change at all during the fixed period.
Changes. Your lender can change your interest rate at any time (up or down).
Less to worry about. You can "set and forget" your rate and never have to worry about it changing during the fixed period.
Watch your rate. You need to keep an eye on your interest rate and consider switching if it gets too high.
Higher fees. Fixed rate loans often have higher exit fees.
Lower fees. Competitive variable loans often come with lower fees than their fixed rate equivalents.
Refinancing. It's often harder to refinance to another loan during the fixed rate period because of fixed loan break costs.
Refinancing. It's easier to refinance a variable rate mortgage.
Fewer features. Fixed rate loans are less likely to have offset accounts or redraw facilities.
But do you need them? These features can come with a higher rate, so if you don't use them they're not really worth it.
Limited extra repayments. Some fixed loans allow extra repayments but these are often limited to a certain amount per year.
More flexible. 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.
When the fixed period on a home loan ends, it reverts to a variable rate. As most home loans have 30-year terms, even if you do fix your rate for a few years, most of your loan will end up being variable anyway.
Which rate type is right for you?
The real question is what do you want from your home loan. This helps you decide which rate type suits you best. Here are some examples to help you think about your own situation.
I want to know exactly what my repayments are each month. You might want to go with a fixed rate loan. With the certainty of an unchanging rate you can budget safe in the knowledge that your repayments won't vary. This means you can basically forget about your home loan for the fixed period.
I want the lowest possible rate and I'm happy to switch lenders. Go with a variable loan (probably). Variable rates are usually more competitive than fixed rates, although that's not always the case. But if you're a deal hunter who's always after a lower rate and is happy to compare and refinance regularly, then a variable mortgage probably gives you more options and is easier to refinance.
I want to repay my loan as quickly as possible. In this case you want the lowest interest rate and a mortgage which allows for extra repayments. This is more likely a variable rate but some fixed rate loans allow extra repayments too.
I may need to refinance my loan soon or sell my property. If you think you're likely to exit a home loan soon, either by repaying it, selling the house or refinancing for some other reason, you probably want a variable rate loan. This is because a fixed rate loan has break costs that can run to thousands of dollars.
If you still can't decide which rate type is right for you, there's a third option.
The third option: Split rates
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. A split rate home loan is when you divide your loan into two (or more) portions; one locked into a fixed rate and the other variable.
This lets you enjoy some of the advantages of both rate types at the same time.
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification.
Refinancing your home loan can get you a better interest rate, adjust your loan term and take advantage of new features, but there are some things to look out for to make sure it's the right decision for you.
Home loan cashback deals can help you refinance to a cheaper interest rate and get a lump sum cash payment. Compare the latest deals and check your eligibility today.
If we sell our house after 5 years and our loan is variable over 25 years do we have to pay the whole interest owing for total of 25 years or does the bank work out interest owing for 5 years and penalty fees?
Thank you for reaching out to finder.com.au a financial comparison website.
If you have been repaying your loan with principal and interest repayments you will only be repaying the remaining principal and interest amount that you owe to the lender, they will not also work out how much interest you would have repaid during the life of your loan.
You may be able to ask your lender for a payout amount for a specific date to give you an idea of how much you will repay.
How likely would you be to recommend finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Important information about this website
finder.com.au is one of Australia's leading comparison websites. We are committed to our readers and stands by our editorial principles
We try to take an open and transparent approach and provide a broad-based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.
Some product issuers may provide products or offer services through multiple brands, associated companies or different labeling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.
We make money by featuring products on our site. Compensation received from the providers featured on our site can influence which products we write about as well as where and how products appear on our page, but the order or placement of these products does not influence our assessment or opinions of them, nor is it an endorsement or recommendation for them.
Products marked as 'Top Pick', 'Promoted' or 'Advertisement' are prominently displayed either as a result of a commercial advertising arrangement or to highlight a particular product, provider or feature. Finder may receive remuneration from the Provider if you click on the related link, purchase or enquire about the product. Finder's decision to show a 'promoted' product is neither a recommendation that the product is appropriate for you nor an indication that the product is the best in its category. We encourage you to use the tools and information we provide to compare your options.
Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment when you click on those buttons or apply for a product. You can learn more about how we make money.
When products are grouped in a table or list, the order in which they are initially sorted may be influenced by a range of factors including price, fees and discounts; commercial partnerships; product features; and brand popularity. We provide tools so you can sort and filter these lists to highlight features that matter to you.
Please read our website terms of use and privacy policy for more information about our services and our approach to privacy.
The real question is what do you want from your home loan. This helps you decide which rate type suits you best. Here are some examples to help you think about your own situation.
If we sell our house after 5 years and our loan is variable over 25 years do we have to pay the whole interest owing for total of 25 years or does the bank work out interest owing for 5 years and penalty fees?
Hi Cath,
Thank you for reaching out to finder.com.au a financial comparison website.
If you have been repaying your loan with principal and interest repayments you will only be repaying the remaining principal and interest amount that you owe to the lender, they will not also work out how much interest you would have repaid during the life of your loan.
You may be able to ask your lender for a payout amount for a specific date to give you an idea of how much you will repay.
Regards
Jodie
Regards
Jodie