Fixed Rate and Variable Rate Home Loans

Interest rates can change regularly or stay steady, depending on the economy at the time. Choosing a fixed or variable interest rate home loan can help you reduce interest charges over the life of your home loan

It is useful to check from time to time if you are better off with a fixed interest rate for your home loan, a variable interest rate home loan, or a combination of both.

Here are some questions to ask yourself to help with your decision:

  • What do I want/need from my home loan in the short to medium term?
  • What is the difference between fixed home loan rates and variable home loan rates?
  • Which home loan/s in today’s market will suit my situation?
  • How flexible are different fixed and variable home loans?
  • What interest rates are currently available from a wide range of lenders?
  • What are the costs for different fixed rate and variable rate home loans? How do they compare over a certain period of time?
  • Are there special home loan offers available in the market?

Find Out More About Your Fixed or Variable Options

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Variable interest rate home loans

Variable interest rate home loans come in two forms, standard variable and basic variable. Both of these variable home loans work in a similar way but the main difference is the interest rate charged and how much flexibility is available. More information about the differences between the basic and standard variable home loans is on our variable home loans page.

A variable interest rate home loan is affected by economic conditions both within Australia and around the world, so you can expect your home loan repayments to rise and fall over the term of your loan.

Variable interest rate home loans Pros

  • Your home loan repayments will fall when interest rates fall
  • You will have the opportunity to reduce your home loan balance faster
  • Can be very flexible and will often allow unlimited additional repayments
  • The average variable interest rate is generally lower than a fixed home loan rate

Variable interest rate home loans Cons

  • Your home loan repayments will rise when interest rates rise
  • If interest rates rise quickly, your home loan repayments over a certain period of time may be more than those of a fixed interest rate home loan over the same period of time
  • If you have borrowed at or near your repayment capacity, it is risky if interest rate do rise


Fixed interest rate home loans

Fixed interest rate home loans offers you a fixed interest rate so you have a fixed repayment amount over a set term, usually between 6 months and 10 years. The most commonly used fixed interest rate term in Australia is3 years.

A fixed interest rate home loan is set by your lender; they borrow money from the wholesale money markets and then sells’ this on to you. The cost to the lender of borrowing this money is determined by what the money markets believe interest rates will do over a set term. Your lender will then add a margin to this, the final interest rate is then offered to you for the fixed term you are applying for.

Fixed interest rate home loans Pros

  • You will know how much your loan repayments will be for a fixed period, regardless of market interest rate changes
  • Protects you against interest rate rises

You can pick the time period to suit you; fixed terms are available from 6 months to 10 years

Fixed interest rate home loans Cons

  • May be less flexible than a variable home loan rate, limiting additional repayment options and excluding the option to redraw
  • If your circumstances change and you want and/or need to exit the loan early, early exit fees will apply
  • Over the term of your loan you may end up paying more than if you had selected a variable home loan, even in a rising interest rate market

Use fixed and variable interest rate loans to your advantage

You don’t have to choose justa fixed home loan rate or a variable home loan rate, there are some options available that help you to minimise how much home loan interest you might pay.
One common option is to split your home loan so that it is part-fixed/part-variable. A single split between fixed and variable is most common, but in some cases you may be able to split your home loan a number of times e.g. part-variable/part-fixed for one year, part-fixed for three years.

Another option is to choose a variable interest rate home loan, but make your home loan repayments at the same level they would be if you had chosen a fixed home loan rate. This works well when variable interest rates are much lower than fixed interest rates by helping you to reduce your principal debt. You will reduce the length of time it takes to repay your loan and also the total amount of interest charged over the life of the loan.

There is also the added benefit that, if you really need it, you can redraw some of those additional repayments at a later date, something you can rarely achieve with a fixed home loan rate.