Fixed or variable: What rate is best?

You’d be correct in assuming they’re quite self-explanatory – a fixed home loan doesn’t fluctuate with the market, while a variable one does – but there is a lot more to these loans than meets the eye.

Fixed versus variable

Fixed home loan rates mean that the interest you pay stays the same for the duration of the loan, which is usually between one and five years. So whether the Reserve Bank of Australia (RBA) and your lender are cutting interest rates or whether they’re raising them, you’re not impacted one iota. It’s a bit of a double-edged sword – you’re safe from unpredictable market fluctuations, but you’re also unable to benefit from decreased rates.

With variable rates, you’re at the mercy of the RBA and your lender of choice. So, while interest rates are quite low at the moment (at the August board meeting the RBA continued to keep the cash rate on hold at a record low) if the rate increases, you’ll be privy to that as well. Again, you encounter that darn double-edged sword.

Yes, fixed and variable rates have their pluses and minuses in the overarching scheme of things, so let’s look at them a little closer to see which pros and cons will impact on your situation the most.

Spotlight on fixed rates

If you’re a stickler for budgeting, fixed-rate home loans make budgeting much easier. For the term of your loan, you know what your repayments will be. The rates have been increased? You’re impervious. This predictability has more benefits than pure peace of mind – it can also help you budget into the future, which is greatly beneficial to those on a tight budget because they’re able to predict their output.

As wonderful as all of that sounds, it’s time to look at the flip side. As we mentioned, you won’t be hit by any market fluctuations, so you won’t benefit if rates get lowered. Another thing to consider is that if you suddenly come into a wad of money, your options for additional payments may be limited, or not allowed at all. You’re pretty much locked in. You can also be penalised for paying more than the approved extra repayment limits and relatively hefty exit fees can apply if you ditch your loan before the end of the term.

So with all of that in mind, before you commit to a fixed loan, you want to make sure you’ve read through the breakout costs and penalties you could possibly incur, so you don’t come across any surprises when you’re at the tail end of your repayments.

Related: home loan repayment calculator

Variable’s time to shine

While fixed home loan rates are static, variable rates are fluid – you’ll reap the benefits of low interest rates and be stung when they rise.

Variable rates generally have more features than fixed rates, including redraw facilities, the option to make extra repayments and more flexible loan features – you’re not as ‘locked-in’ as you are with a fixed rate.

Having said that, it can be difficult to see which way the market will turn, so you need to be prepared for the ebb and flow of the market and be aware that your budget will be affected by increased rate changes. You will not be able to be as rigid as you would with a fixed rate.

When selecting which home loan type is best for you, you really need to look at the current state of your finances as well as your vision for the future: how much security do you need? How much flexibility does and will your lifestyle afford you? Are you going to hold on to your home in the long term? It’s not just what offers the best deal – it’s what suits your lifestyle and goals the most.