Variable or Fixed Home Loan



Are you looking to purchase or refinance your home and not sure which option is best for you?

Applying for a home loan has never been easier or more straightforward with advancements in technology. There are, however, endless options which can make selecting the right loan extremely confusing without expert assistance.  When obtaining finance, we tailor your home loan to your needs, so you can rest assured you have the best loan that works for you. With that said, it is important for you to know the types of interest rates available and understand the difference between the two.

What is the difference between fixed and variable home loan rates?

An interest rate is a percentage that defines how much you will pay your lender each month as a fee for borrowing money.  There are two types of rates you can choose:

Fixed Interest Rate

Just like the name suggests, the interest rate stays constant and you pay a fixed amount of money as instalments throughout the period you have chosen to fix. Fixed rate periods in Australia are generally between 1-5 years. Let’s say you have a 3-year fixed-rate loan with a 3.25% interest rate. No matter what is going on in the market, you’ll still be paying 3.25% interest until the fixed rate expires, you refinance your loan or you sell the property and close the loan. Fixed-rate loans offer a set payment each month, making budgeting easier and giving you peace of mind. It’s important to note that if interest rates decrease below your fixed rate, you will remain on the higher rate. Also, if you want to exit your fixed rate early you may be liable for break costs.

Variable Interest Rate

A variable interest rate employs a floating rate, and depending on how the market rate changes, your monthly payments can and will vary, at the lender’s discretion. Home loans with variable interest rates are bound to a base rate offered by different lenders along with a variable element. The interest rate changes from time to time, and changes in the base rate will influence it. However, fluctuations do not occur very often as it is dependent on the market trend. 

Variable or Fixed Home Loan

Which one should I go for? Fixed or variable interest rate?

Now that you know what fixed interest rates and variable interest rates are, it is time to decide on one that would work for you. Whilst variable interest rates have maintained popularity in recent years with record low interest rates, fixed rates have also been popular with people wanting to “lock in” the low rates in case rates start to increase again. We can’t say for sure which option is better – it is all about what you need and what works best for you. We often suggest for our clients to have a mix of both to enjoy the knowledge they have a portion of their loan on a set rate for a period of time, whilst also being able to enjoy benefits that are only available with a variable rate loan.

Here are some pros and cons of the two types of rates mentioned:



Fixed Interest Rate

  1. Constant, unaffected by the market
  2. Peace of mind for repayments
  3. Less variation between lenders
Variable Interest Rate
  1. Potential for minimum repayment to reduce if rates drop 
  2. Easier to refinance (without attracting break costs)
  3. Repayment flexibility
  4. Additional loan features available such as offset account
  5. No penalties for additional repayments

Fixed Interest Rate

  1. Often higher than variable interest rates
  2. You are required to pay the same interest rate even if rates reduce

Variable Interest Rate

  1. Less certainty for budgeting
  2. Repayments may increase when rates change

Final words

Don’t get lost in the special features

A home loan should be simple- you borrow money from a lender and repay the amount with interest over time. Some financial institutions might try to sell you on special features but don’t get caught up in thinking you need all of these, because ultimately it might not be of any use to you, and can sometimes end up costing you more.

Choose the rate that suits you best

Fixed-rate or variable rate- what you choose is up to you. It is all about understanding your options and then selecting what works best for your individual situation.

Talk to Odin Mortgage today so we can ensure you are making the right choice. 

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