Fixed or Variable Home Loan - Which Is Best For You?

by satish

Nov 03, 2023

Home loan becomes a necessity for individuals hustling to realise their homeownership dream. Hurtling towards an attractive home loan package without any research may result in unwelcome debt. There are various factors that need to be considered when approaching a lender for a loan. One such factor is choosing a fixed or variable home loan interest rate. The fixed home loan rate carries the agreed-upon interest rate for a fixed loan tenure; meanwhile, the agreed-upon interest rate fluctuates as per the economy under a variable home loan rate. 

Read this blog to understand fixed vs variable home loan interest rates and choose the one that matches your financial needs.

Fixed Home Loan Interest Rates

Fixed home loan interest rates in Australia allow borrowers to lock in a fixed rate of interest on their home loan for a specific period of time. This is useful for borrowers seeking certainty in loan repayments and wanting the peace of mind that their interest will not fluctuate with market rate swings. As the fixed period nears its completion, the borrower can switch to a variable rate or extend the fixed rate longer. Because of this flexibility, fixed home loan interest rates have become a popular alternative for consumers seeking security and predictability from their mortgage.

Variable Home Loan Interest Rates

Variable home loan interest rates in Australia are determined by market conditions and the official cash rate set by the Reserve Bank of Australia. Variable rates have generally been low in recent years, enabling a wide choice of cheap home financing options. However, they can be subject to rate adjustments based on external circumstances, so borrowers should evaluate their ability to manage risk when rates are variable rather than fixed. Finally, consider the possible benefits of a fixed or variable home loan in 2023 when shopping for a loan.

Advantages of a Fixed Rate Home Loan

In the battle of fixed vs variable loans, one must know the following advantages of the fixed-rate home loan to get the best results. 

  • If the official interest rate rises, repayments do not rise.
  • Borrowers who are anxious about interest rate increases will have peace of mind.
  • Borrowers will discover that a fixed rate and rigid repayment plan make budgeting easier.
  • The repayments become predictive as the amount does not fluctuate

Advantages of a Variable Rate Home Loan

Having understood the advantages of a fixed rate, let's move on to the edges of the variable rate. This will help a borrower to choose wisely - a fixed or variable home loan.

  • It gives the freedom to make unrestricted additional repayments.
  • There are no break or exit fees.
  • Interest payments will be reduced if interest rates fall in the borrower’s favor.
  • It is possible to open offset and redraw accounts.
  • It eases the process of switching loans or loan kinds.

Difference Between Fixed Rate and Variable Rate Mortgages

It is necessary to know the differences between fixed vs variable home loan. The following table enlists the key differences between the two types of interest rates.

Parameters  Fixed Home Loan Rate Variable Home Loan Rate
Fluctuations Fixed-rate mortgages have an unchanging interest rate for the duration of the loan Variable-rate mortgages have a rate that can change from month to month or over the life of the loan.
Interest Rate Fixed-rate mortgages usually offer a lower interest rate than variable-rate mortgages Variable-rate mortgages can sometimes offer a better rate than fixed-rate mortgages
Payment Flexibility Fixed-rate mortgages tend to have a higher up-front payment. Variable-rate mortgages have more flexibility in how payments are made.
Certainty Fixed-rate mortgages give the borrower more certainty as they know what their repayments will be for the life of the loan. Variable-rate mortgages could see those payments increase.
Restrictions Fixed-rate mortgages usually have more restrictions for the borrower to refinance if the interest rate drops Variable-rate mortgages can be refinanced if the rate drops.

Considerations for Fixed and Variable Home Loans

There are numerous things that must be considered before deciding upon a fixed or variable home loan. The following things must be kept in mind.

Interest Rate Trend

If you believe interest rates will rise, locking in a fixed rate arrangement is advantageous. In the short term, a variable rate agreement is suitable if you believe interest rates will fall.

Anticipated Personal Income Forecast

The choice between fixed and variable rates is driven by the desire for security. Examine your personal income status, taking into account work security, potential wage growth, and present savings.

Loan Term

Though no one knows what long-term economic conditions imply, you can base your decision on short-term conditions if you do not anticipate incurring long-term debt.

Interest Rate Spread

Always compare the terms of both; even if you are inclined to pursue only one, the difference in terms between a fixed loan and a variable credit may influence you one way or the other.

How to switch your home loan from variable to fixed online

It is necessary to choose wisely between fixed or variable home loans in 2023. In case you find yourself in the position to switch your home loan from variable to fixed online, you must follow the below-mentioned steps.

  • Check your current mortgage deal to discover whether there are any early repayment penalties for converting to a fixed loan.
  • Compare rates from different lenders to find the best deal for you.
  • Apply for your new fixed home loan with a mortgage broker or the bank you want to move to.
  • Follow the online application process provided by the lender.
  • Provide the bank with all of the essential documents and information.
  • Complete the paperwork and wait for the transition to go live.
  • Once the transfer is accepted, the lender will set up a date for you to transition from your variable loan to the new fixed loan.

Home loan interest rate scenarios

Home loans in Australia come with fixed rates and variable rates, which in turn are based on the lender and the type of product. Australia has an average variable rate home loan of 6.60% p.a., and the average Big Four bank variable rate is 7.30% p.a. Fixed rate home loans typically begin at 2.39% p.a. Furthermore, if you meet certain conditions, some lenders may provide discounted interest rates. Borrowers usually find themselves with a typical mortgage duration ranging from 20 to 30 years. There are considerable expenditures to consider when evaluating options, particularly the house loan interest rate - fixed or variable home loan.

Frequently Asked Questions

Is it better to have a fixed or variable loan?

You must evaluate your financial needs before landing on a loan rate. A comparison has been drawn in our blog, listing more information on the two types of home loan interest rates.

What is the benefit of a variable home loan?

The repayments under variable home loan rates decrease with a decrease in interest rates over time. There are other benefits of the variable rate, for which you must read our blog.

Should I change from variable to fixed?

You must not switch from variable to fixed rate if your rate has risen once or twice during the tenure. However, if the incurring costs are high, you may as well switch to a fixed rate.

Is the fixed rate always higher than the variable?

The fixed rate depends upon the cash rate. If it is high, the fixed rate will be higher than the variable rate and vice versa.


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