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? Like
most decisions, there are pros and cons for each option. Here are
some things to think about to help you decide.
Pros and cons of fixed rate home
Fixed home loans have an interest rate that is fixed for a set
period of time - often 1, 3 or 5 years. At the end of the fixed
rate term, the loan will usually switch to the standard variable
rate offered by the lender.
Here are some advantages of fixing your home loan:
- Makes budgeting easier - You know exactly what
your repayments will be, so you can plan ahead and set financial
goals with confidence.
- Rate rises won't affect you - If interest
rates rise above your fixed rate, you will be happy knowing you are
paying less than the variable rate.
But there are some disadvantages with fixing your loan:
- Rate drops won't apply to you - You won't
benefit from a drop in interest rates if your fixed rate is more
than the variable rate.
- Limits on extra repayments - Additional loan
repayments are often not allowed with fixed rate loans or
repayments may be capped at a low amount or only permitted with a
- Do you need to redraw? - A redraw facility may not be offered on a
fixed rate loan.
- Break fees - Fixed rate loans may have a break
fee if you change or pay off your loan within the fixed rate
This kind of loan may not be suitable if you are thinking about
selling your home or want the freedom to switch home loans if you
find a better deal.
Get an indication of how much your repayments might be with a
fixed home loan.
What you'll gain and lose with a
variable rate home loan
If you don't fix your loan, your interest rate will move with
changes to market interest rates. This means the interest rate can
rise or fall over the term of your loan. As a result, your
repayments will 'vary' as the rate changes.
Here are some advantages of a variable rate home loan:
- You can make extra repayments - Extra
repayments are usually allowed at no extra cost, which can save you
interest and help you pay off your loan sooner.
- More features - Variable loans often
have attractive features such as unlimited redraws on any additional repayments or
the ability to save on interest by setting up an offset account.
- Easier to switch loans - It is usually easier
and cheaper to switch loans if you find a better deal elsewhere if
you have a variable rate home loan.
Here are some disadvantages of a variable rate loan:
- Makes budgeting harder - It can be
difficult to budget with certainty as loan
repayments can increase when interest rates change.
- Mortgage stress - If you aren't prepared for a
rate rise you may have trouble keeping up with repayments.
Splitting your loan -
part fixed and part variable
Another option is to make a bet both ways by having a part
fixed, part variable interest loan. A split loan allows you to
manage some of the risks of interest rate rises while still being
able to make extra repayments.
There's generally no limit to the way you can split the loan, so
you can allocate the funds 50/50 or 20/80 - the decision is up to
Whatever loan you decide to take out, it needs to work for
you. That means the loan should have the features, flexibility and
fees that are the most appropriate for your needs. See our
information on the fees you could pay for a home loan
and how to check a credit
Case study: Adam and Matti decide to fix part of their home
Adam and Matti have saved up a deposit and want to borrow
$440,000 for a $600,000 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 4.50% their repayment will be $2,456* per month.
- Variable rate loan - If they choose a variable
rate loan at 4.25% they will be repaying $2,394* per month at
first. If the bank increases the variable rate by 0.5% to 4.75%,
they will be repaying around $2,516* per month.
The fixed rate will cost them $62 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
Matti and Adam know their budget will be tight over the next
couple of years (they plan to travel and get married) and they
think they will be stressed if there is a big jump in their
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.
*Based on a 25-year loan with fees of $10 a month.
No one can accurately predict how interest rates
will move, so it's important to choose a loan with the features
that work for you, and then get the best possible mortgage deal you
Last updated: 06 Mar 2019