Loan Rates

Fixed or variable home loan, what’s the difference?

Toni Mladenova
Jun 2, 2021
Yard Financial Pty Ltd | ACN 623 357 513 | Australian Credit Licence 509481

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One of the most significant decisions when choosing a home loan is whether you want to fix your interest rate or opt for a variable interest rate. There are pros and cons to both, and if you can't quite choose between them, you could always consider splitting your home loan.

Understand the critical differences between a fixed or variable home loan and some factors that may help you decide which is right for you.

Fixed vs variable home loan interest rates

The main difference between a fixed or variable home loan is that a fixed home loan locks in the interest rate at the time of signing up for the loan for a period of between one and five years. However, a variable rate home loan leaves the interest rate open to change if interest rates decrease or increase.

Certain home loan features and benefits are available with a variable home loan that aren't available with a fixed-rate mortgage. But these features can sometimes also come with extra fees.

Why might you choose a fixed interest rate home loan?

The most significant benefit of having a fixed rate home loan is that you know what your mortgage repayment will be for the whole time your interest rate is fixed. This means that your repayments won't change if interest rates change, but this could be good or bad, depending on if interest rates increase or decrease.

If having the certainty of knowing what your repayments are is important to you, you're likely to go for a fixed vs variable home loan. But there are some factors that you’ll miss out on when you choose to fix your home loan.

When you choose the certainty of mortgage repayments with a fixed rate home loan, you lose:

  • Flexibility in your home loan to refinance or change any part of the loan without incurring break fees.
  • The ability to make unlimited additional repayments, fixed-rate home loans sometimes offer extra repayments. Extra repayments on fixed-rate home loans are often capped at $10,000-$20,000 or similar per year and if you exceed this cap you’re often charged a fee.
  • Additional home loan features like an offset account or redraw facilities. 
  • Possible savings on interest if the interest rates available in the market decrease during the fixed period. 

Why might you choose a variable interest rate home loan?

There are few benefits to choosing a variable home loan over a fixed home loan with the prospective savings if interest rates decrease. You can also easily refinance your home loan, make additional repayments or pay out your home loan in full at any time without penalty.

You're also likely to find a more extensive range of home loan features with a variable rate home loan. 

Features available with variable home loans that often aren’t available with fixed home loans:

  • Unlimited extra repayments.
  • Redraw facilities to access these additional repayments.
  • Offset account to help save on interest charged.

Lenders each take their own view when it comes to the fees for these features.

The flexibility of a variable-rate home loan does swing both ways, you could save on interest if rates go down but you could also pay more if rates increase. The possibility of an interest rate increase should be included in any budgeting you do for your home loan repayments. 

If you can't decide, consider splitting your home loan

There is a way to get the benefits of both a fixed and variable rate home loan; it's called splitting your home loan. This means that you take a portion of your loan amount and apply a fixed interest rate, and the rest of the loan amount has a variable interest rate.

You could choose to split your loan 80/20 with 80% of the loan amount under a fixed interest rate and 20% under a variable interest rate. You can access the benefits of a variable interest rate like having an offset account, making extra repayments or just benefit from lower interest rates if they change. At the same time, you have the peace of mind of knowing part of your mortgage repayments will remain the same even if interest rates increase.

Whether you choose to go with a fixed or variable home loan or split your loan, you should always make sure you understand all features, benefits and risks of each. If you're looking to compare fixed or variable home loans, check out Yard's range of home loans here.

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