Fixed vs variable home loans
To fix or not to fix
If you're about to buy a house or you're looking to refinance
you may be asking yourself, should I fix my home loan or not?
Especially with interest rates at an all time low.
Here are some things to consider to help you decide.
What you will gain by fixing your
Fixed rate home loans are usually for a set period of time -
often 1, 3 or 5 years.
Here are the advantages of fixing your loan:
- Makes budgeting easier - You know exactly what
you're repaying. Whereas with a variable rate loan your repayments
can 'vary' as rates change. See our budgeting
- Rate rises don't matter - If interest rates
rise above your fixed rate, you will be happy knowing you are
paying less than the variable rate.
What you will lose by fixing your
Here are the disadvantages of fixing your home loan:
- Rate drops will annoy you - If rates go down
below your fixed rate you will be repaying more than the variable
rate and you won't benefit from the rate drop.
- Can you make extra repayments? - Extra loan
repayments are often not allowed if you have a fixed rate, or may
only be allowed with a fee. Variable rate loans usually allow you
to make extra repayments at no cost.
- Break fees - Fixed rate loans may also have a
break fee if you change or pay off your loan within the set period
e.g. if you sell your home
Check all the terms and conditions of the loan so you know what
you are up for. See our information on the
fees you could pay for fixing your loan and
how to check a credit contract.
Splitting your loan
Another option is to make a bet both ways and only fix part of
your home loan.
Some people fix 50% of their loan and keep 50% as variable to
manage some of the risk of interest rate rises while still being
able to make extra repayments.
Case study: Adam and Matti decide to fix part of their home
Adam and Matti have saved up a deposit and want to
borrow $240,000 for a $300,000 apartment.
Using MoneySmart's mortgage calculator they work out
what their repayments will be for a fixed or variable rate
- Fixed rate loan - If they fix their rate for 3
years at 5.50% their repayment will be $1,484 per month.
- Variable rate loan - If they choose a variable
rate loan at 5.25% they will be repaying $1,448 per month at first.
If the bank increases the variable rate by 0.5%, they will be
repaying around $1,520 per month.
The fixed rate will cost them $40 more per month to start with
but it will save them money in the future if the variable rate
increases. The variable rate is tempting because they would pay
less right now and have the flexibility to make extra repayments
However, Matti and Adam know their budget will be tight over in
the next couple of years (they plan to travel and get married) and
think they will be stressed if there is a big jump in mortgage
They decide to fix two-thirds of their home loan for 3 years so
they can still make extra repayments if they have extra money.
No one can accurately predict how interest rates
will move but as long as you're happy paying the amount on a fixed
rate loan, and you don't need the flexibility of making free extra
repayments in the short term, a fixed rate loan is a reasonable
Last updated: 03 Aug 2015