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Fixed vs variable home loans: Which one may be right for you?

Whether you choose a fixed or a variable home loan can depend on your personal preferences. Here, we explore some of the differences between fixed and variable home loans, to help you decide what’s best for you.

There are many home loan options available. These may include the repayment type (eg. ‘principal and interest’ vs ‘interest only’ repayments) and the type of interest rate. In this article, we focus on types of interest rate and how they can affect a home loan. 

Generally, when you take out a home loan, you have two choices: a fixed interest rate or a variable interest rate. 

A fixed interest rate home loan is one where your interest rate is locked in (i.e. fixed) for a certain period, typically between one and ten years. During the time your interest rate is fixed, both your interest rate and your required repayments won’t change.

A variable interest rate home loan, on the other hand, can change at any time. Lenders may increase or decrease the interest rate attached to the loan. The interest rate may change in response to decisions made by the Reserve Bank of Australia, as well as other factors. Your required minimum repayment amount will increase if interest rates go up, and decrease if interest rates fall.

Which one is better for you? It really depends on what you’re looking for in a home loan. Here are some of the pros and cons of each.

Fixed rate home loans

A fixed rate home loan can give you peace of mind that the required repayment amount will be the same during the period of the fixed term, which can be very handy when you are trying to stick to a budget.

You can generally choose the time period you would like to fix your interest rate for. Depending on the lender, this could be for up to 10 years. Generally, at the end of the fixed term your loan will roll over to a variable rate, unless you choose to repeat the process.

While a fixed interest rate can be useful to help protect you against potential interest rate rises, it can mean that you’re stuck with the fixed rate if variable interest rates decrease during the fixed period.

Most people shop around for a great fixed rate deal before they apply for a home loan. Yet, they may not be aware that the fixed interest rate applied to their home loan is set at the time of the loan settlement. For example, the fixed interest rate may change between the time you applied for the loan and the settlement date.

You may be able to secure the fixed interest rate before settlement by paying a ‘lock rate’ fee. Please discuss with your lender whether a lock rate is best for you, if you choose a fixed rate loan.

Fixed rate home loans generally have fewer features than variable rate home loans. For example, with a fixed rate loan you may not be able to access the redraw.

It's also important to note that if you decide to pay off or refinance your home loan before the end of the fixed term, you may have to pay break costs. These may be significant.


Variable rate home loans

A variable rate home loan typically offers more flexibility than a fixed rate home loan. It generally comes with a range of features which may help you react to changes in your life or financial circumstances.

For example, many variable rate home loans let you make additional repayments to pay off your loan faster, and then let you redraw these additional funds if you need them in the future. Many variable rate home loans also have an offset account feature, which could help to reduce the amount of interest you pay.

A potential drawback of a variable rate home loan is that interest rates can change at any time. This means they can go up and down. It's a good idea to consider whether you can afford higher loan repayments if interest rates were to go up.

Can’t decide? Perhaps consider splitting the loan

If you can’t decide whether to go with a fixed or variable home loan, then you could consider splitting your loan between the two options.

If you split your home loan, it means that you assign a certain portion to a variable home loan, and the rest to a fixed home loan. You may choose to go 50:50, 60:40 or some other ratio. It’s up to you.

Ask your lender about your options.

To sum up

  • When you take out a home loan, you generally have to choose between a fixed interest rate or variable interest rate.
  • A fixed interest rate home loan is one where your interest rate is locked in for a certain period, so your loan repayments remain the same over the fixed rate term.
  • With a variable interest rate home loan, the interest rate attached to the loan can change, so your required monthly repayment may increase if rates go up; it may decrease if interest rates decrease.
  • There are pros and cons to each type of loan. Consider which option is best for you.
  • You can choose to split your loan between the two options. 

Calculators to help you plan

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Connect with a First Home Coach who'll guide you through the process of buying your first home ­­ from start to finish.

Talk to a First Home Coach on the phone, or drop in for a chat at one of our ANZ branches.

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Any advice does not take into account your personal needs and financial circumstances and you should consider whether it is appropriate for you and read the relevant Terms and Conditions, Product Disclosure Statement and the ANZ Financial Services Guide (PDF, 104kB) before acquiring any product. 

Reports are based on a range of data sources, are not indicative of future performance, are subject to change and are only for personal domestic use. Price estimates may not be available for all sales and properties, and are estimates, not valuations.

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