A fixed rate home loan means the interest rate stays the same for a set period of time. This means you will have the security of knowing what the repayments will be during and can budget accordingly.
With a variable rate loan, the interest rate can change from time to time, which in turn impacts your repayments. While interest rates generally move in line with the Reserve Bank’s movement of the cash rate, a lender can change its variable interest rates at any time.
Some lender offer combinations of both part fixed and part variable home loans.
Fixed rate loans – the Pros
- Borrowers know what repayments will be for the duration of the fixed rate period, so can budget accordingly
- Fixed rate loans are not affected by the interest rate market during the fixed rate period
Fixed rate loans – the Cons
- Fixed rate loans are more rigid in their terms and conditions than variable rate loans
- Lenders usually charge fixed rate break costs if you prepay more than a predetermined threshold during the fixed rate period. These break costs can be considerable.
- If variable interest rates fall, your fixed rate may end up being higher than the variable rate dependant on interest rate fluctuations
Variable rate loans – the Pros
- Variable rate home loans generally give the borrower more flexibility (greater choice with payment frequency and amount, and possibly other features depending on the lender and individual product features)
- Variable rate home loans can include lots of extra features generally not offered by fixed rate loans, including low introductory rates for an initial period of the loan (depending on the lender and individual products)
- When market interest rates are low, mortgage repayments will usually reflect the lower rates of a variable rate loan.
Variable rate loans – the negatives
- Variable rate loans are subject to interest rate fluctuations
- Repayments can change with each shift in interest rates making budgeting more difficult.