Variable vs fixed home loan rates in Australia explained

Fixed vs variable home loan rates, explained. What’s the difference and which is better?

Whether refinancing or taking out a home loan for the first time, a competitive rate could save you thousands of dollars. But should you go fixed, variable, or even a combination of the two?

Australians are refinancing at record rates amid recent RBA interest rate increases. The value of owner-occupier refinancing between lenders rose to a record 9.1% in November 2022, according to the Australian Bureau of Statistics (ABS).

The average variable rate in December 2022 was 5.45% while fixed rates were 5.81%, according to Mozo.

That’s a difference of about $115 a month or $40,500 across a 30-year $500,000 mortgage. So, choosing the right interest rate on your loan is worthwhile.

What’s the difference between fixed and variable home loans?

Fixed and variable refer to the two major types of home loan rates on the market in Australia.

The difference between the two comes down to the interest rate.

With a fixed rate, the interest rate remains set in place of ‘fixed’ for a specified period.

For a variable rate, the interest rate can fluctuate, going up or down depending on broader interest rates and your lender.

You can also combine the two into a split rate home loan, potentially allowing you to take advantage of the features of both.

A split rate divides your loan into multiple parts which are financed at both fixed and variable rates. They offer a combination of mortgage features.

How does a fixed rate home loan work?

A fixed rate home loan is one in which the interest rate you pay is locked in place or ‘fixed’ for a set period.

This period varies but is typically between one and five years.

When you take out a fixed rate, you are guaranteed that the interest rate you pay month to month will remain the same and will not fluctuate.

At the end of a fixed term, you can choose to either move into a variable rate home loan, or refinance to either a split rate home loan or another fixed rate home loan.

You can typically break out of a fixed rate home loan early if you wish, although it is likely your bank or lender will charge you a fee.

What are the pros and cons of a fixed rate mortgage?

Benefits of fixed interest rate

• Protection from rate rises - If interest rates go up, your repayments will remain consistent, protecting you from rate rises throughout your fixed term.
• Certainty in your repayments - Knowing how much your mortgage will cost you each month can give you the ability and peace of mind to budget for other expenses.
• Potential to save on fees and charges - Variable home loans come with various extras, but these can be expensive, so if you’re happy without them, you can avoid some fees with a fixed rate.

Potential drawbacks fixing your interest rate

• Lack of features - The features of a variable rate home loan can be convenient. For instance, an offset account can be used to lower the balance of your home loan while accessing funds for everyday banking. Some fixed-rate loans do come with a redraw facility, but you need to check with your lender to see if this is available.
• Potential to miss out on rate cuts - If interest rates fall, you will not get the benefit of this if you have locked in your rate.
• Inability to make additional repayments - Variable home loans generally allow you to make additional repayments to pay off the balance faster, but one of the trade-offs for the certainty of a fixed rate is that you may not be able to do this.

Which one is for me?

Deciding between a fixed, variable, or split rate could save you thousands of dollars in repayments amid rising interest rates.

If interest rates are expected to rise, a fixed rate may be appealing as your interest rate could be less than the current cash rate. If they fall, though, a variable might be the way to go.

Choosing the ‘correct’ rate depends greatly on your circumstances, though. It helps to shop around to find the best rate.

Refinancing or taking out a new loan? I can help you compare from over 20 lenders to find the best deal today.