Fixed Rate vs. Variable Rate

There is a lot to consider when deciding between a fixed and variable home loan interest rate, or whether to have a portion of your loan fixed, and a portion variable. A low rate isn’t the be all and end all.

Let’s look at some of the basic differences between fixed and variable interest rates.

Variable Rate

• Rate (and repayment) can fluctuate (variable) at any time, in line with the RBA’s cash rate decision or at the lender’s discretion
• May allow unlimited additional repayments without penalty
• May allow redrawing of additional repayments with little or no conditions
• Don’t generally involve break fees/penalties for the borrower when exiting, fixing, or varying the loan and/or property title
  
  

Fixed Rate

• Rate (and repayment) remains the same (fixed) for a pre-determined amount of time
• May have restrictions on the value of additional repayments which can be made above the minimum contracted amount, during the fixed term
• May have restrictions on redrawing additional repayments
• May have expensive “break” costs/penalties to exit the fixed rate prior to the pre-determined term
• May have restrictions on additional borrowing, product switches or other variations to the loan and/or property title
  
  

Some important considerations when choosing between fixed interest rate or variable interest rate loans are:

• How has your financial situation changed over the last few years?
• What changes are you anticipating over the next few years, which may affect your financial situation?
• How much extra are you planning on paying off your loan during the proposed fixed term?
• Will you need to access additional repayments in case of unforeseen circumstances, or do you have a separate “rainy day fund?
• Do you prefer the certainty of your repayments staying the same for a set amount of time, or the flexibility that accompanies fluctuating repayments
• Are you likely to sell the security property during the proposed fixed term?
• Are you likely to borrow additional money during the proposed fixed term?