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What is the difference between a variable and fixed rate home loan?

November 3, 2021

If you’re in the market for a first home, you’re probably weighing up on how to repay your loan. Adding to this weighty decision is that some commentators seemed to be urging the Reserve Bank to increase the official cash rate well before its preferred timetable of 2024.

While it seems that the Central Bank is sticking to its guns, if you have concerns about making your mortgage repayments should interest rates rise, then you have the choice of using a home loan with a fixed rate. With a fixed-rate mortgage, the interest rate you pay will stay the same no matter whether interest rates go up or down during the fixed term. Although this is quite rare, don’t forget that lenders can take matters into their own hands and increase rates independently of the Reserve Bank.

Using a fixed rate also makes it easy to budget for your loan repayments because they won’t change at all. Fixed-rate terms are usually available for 1-5 year terms. After that, your home loan will usually switch back to a variable interest rate.

Alternatively, you could go with a variable rate loan from the get-go. A variable interest rate will likely shift up – and down – over the term of your loan as interest rates fluctuate over time. These changes can mean your loan repayments adjust, too, with increases in markets rates passed onto you in full if you choose a variable rate.

If you have concerns about what rates could do, you could always choose to fix a portion of the mortgage as part of a “split loan”, with the remainder on a variable rate.

A split loan is a bit like an “each way bet” on the direction of interest rates and the broader economy, especially as no one truly knows what the markets will do in the next six months.

Suppose you’re a first-time investor. Apart from picking between a variable or fixed rate, you may decide between making principal plus interest repayments or interest-only repayment on your new loan. An interest-only loan will lower the regular repayments – but you won’t pay off the mortgage balance.

Need help sorting through the home loan lingo? Talk to the team at Our Broker on 1800 913 677 today.