The main difference between fixed and variable home loans is the amount of interest you pay on each repayment cycle. Choosing the right loan for you comes down to your current and future financial goals. Read on for the differences between the two options.
| Key Differences Between Fixed Interest and Variable Interest Home Loans | |
| Fixed Rate | Variable Interest |
| Predictable interest rates | Fluctuating interest rates |
| Limited prepayment options | Flexible prepayment options |
| Limited loan features | More loan features (redraw and offset facilities) |
Fixed Rate Home Loan
Fixed-rate home loans have a set interest rate for a specified period, typically ranging from one to five years. This fixed interest rate means that the repayment amount on your mortgage remains consistent during the fixed term, regardless of prevailing market conditions.
Such predictability makes fixed-rate home loans ideal for homeowners who want the peace of mind that comes with being able to plan their mortgage repayments.
At the end of the fixed rate term, most lenders will automatically convert your loan to a standard variable rate home loan. However, you can choose to refix the loan or opt for a split loan, which offers the best of fixed-rate and variable-interest home loans.
Pros
- Predictable repayments during the fixed term
- Can be cheaper due to fewer additional loan features
- Protects you against rising interest rates
Cons
- Limited prepayment options (you may incur additional charges for prepayments that exceed the capped amount)
- Repayment rates don’t reduce when the average market rates fall
Variable Interest Home
As the name suggests, variable interest home loans have interest rates that fluctuate in response to prevailing economic conditions. Lenders adjust the interest rates of their variable home loans depending on the cash rate as determined by the Reserve Bank of Australia.
While this means that your repayment amount may vary, you have greater flexibility in prepaying your loan or utilising additional loan features, such as offset accounts, which can make your loan more affordable.
Pros
- Repayments reduce with falling interest rates
- More flexibility in making additional payments
- Easier to switch to other home loan options
- Additional optional facilities, such as offset accounts and redraw facilities
Cons
- Repayment amounts increase when interest rates rise
- More loan features may make the loan costlier
Choosing the Best Home Loan
Your current financial circumstances and future goals are the primary factors in determining the type of home loan to choose. Here are some tips to help you choose:
- Compare loan facilities from different lenders based on interest rates, ongoing charges, features, loan terms, monthly repayment amounts and loan features
- Choose a loan facility that you can afford to pay based on your current income, debts, down payment, and your recurring monthly expenses.
- Calculate the cost of optional features before requesting them, as they may increase the cost of your mortgage.
- Consider working with a licensed mortgage broker to help you choose a home loan that aligns with your needs and goals.
- Consider the ease of switching from one loan option to another, depending on your changing financial needs
- Consider going for a split loan, which allows you to repay a portion of the loan as a fixed-rate loan and the other as a variable-interest loan