When taking out a home loan, one of the biggest decisions you’ll face is whether to choose a fixed or variable interest rate. Each has its advantages and considerations. The best choice for your circumstances depends on factors like financial stability, market trends, and property goals.
In this blog post, our home loan brokers compare fixed vs variable home loans. We look at how each works, their benefits, potential risks, and how to decide which suits your situation.
What is a fixed-rate home loan?
A fixed-rate home loan locks in your interest rate for a set period. This is usually 1-5 years, though some lenders may offer terms of up to 10 years.
This means your repayments stay the same, regardless of market changes or Reserve Bank of Australia (RBA) rate adjustments.
Fixed loans provide stability and predictability. They’re a popular choice for borrowers who want to avoid surprises in their budget.
However, they also come with less flexibility, especially if you make extra repayments or refinance before the term ends.
Who is a fixed-rate home loan good for?
A fixed-rate loan is ideal if you:
- Prefer certainty in your repayments and want to budget with confidence
- Expect interest rates to rise and want to lock in a lower rate
- Are purchasing your first home and need financial stability
- Have a set financial plan and don’t anticipate refinancing or making large extra repayments
However, if you want flexibility in your loan, such as the ability to refinance, switch lenders, or make unlimited extra repayments, a variable-rate loan may be a better fit.
Pros and cons of a fixed-rate home loan
Pros
- Predictable repayments – Your interest rate stays the same, making budgeting easier
- Protection from interest rate rises – If rates increase, your loan stays locked in at a lower rate
- Peace of mind – No surprises, so you won’t have to worry about market fluctuations
Cons
- Less flexibility – You may face break fees if you refinance or switch before the fixed term ends
- No benefit if rates drop – If interest rates go down, you’re locked into a higher rate
- Limited extra repayments – Some lenders cap additional repayments or charge fees for paying off the loan early
What is a variable home loan?
A variable-rate home loan means your interest rate can change over time based on market conditions. Factors like the RBA’s cash rate and your lender’s policies influence this.
With a variable loan, your repayments may go up or down, depending on home loan interest rate movements.
While this introduces some uncertainty, it also gives you greater flexibility, similar to interest-only home loans.
Advantages include the ability to make extra repayments, access features like offset accounts to reduce interest, or refinance without significant penalties.
Who is a variable home loan good for?
A variable-rate home loan is an option to consider if you:
- Want the flexibility to refinance, switch lenders, or pay off your loan early
- Are comfortable with market fluctuations and potential rate changes
- Expect interest rates to decrease and want to take advantage of lower repayments
- Plan to make extra repayments to pay off your loan faster
If you prefer certainty in your budget and don’t want to risk higher repayments, a fixed-rate loan may be a safer option.
Pros and cons of a variable home loan
Pros
- Potential savings – If interest rates drop, your repayments decrease
- More flexibility – Easily refinance, switch lenders, or adjust your loan structure
- Unlimited extra repayments – Pay off your loan faster without restrictions
Cons
- Unpredictable repayments – Your loan costs can rise if interest rates go up
- Market risks – Economic changes can increase your repayment amount
- Harder to budget – Monthly repayments may fluctuate, making financial planning less stable
Should you choose fixed, variable, or a ‘split’ loan?
If you’re unsure whether to commit to a fixed or variable loan, a split loan offers a middle ground. A split loan divides your mortgage into two: one part with a fixed rate and the other with a variable rate.
You can enjoy the stability of fixed repayments while still benefiting from potential interest rate drops on the variable portion.
Some lenders allow you to choose the ratio. For example, 50% fixed and 50% variable, or a custom split like 70/30 or 60/40. This will depend on your financial preferences.
Borrowers who don’t meet traditional lending criteria may also consider alternative loan structures like low-doc home loans.
Benefits of a split loan
- Balance of stability and flexibility – Fixed repayments on part of your loan, with flexibility on the variable portion
- Protection against rising rates – The fixed portion shields you from major market increases
- Potential savings – If rates drop, you can benefit from lower repayments on the variable portion
- Extra repayment options – Some lenders allow extra repayments on the variable component
Limitations of a split loan
However, a split loan can also come with some limitations:
- Can be complex – Managing two loan structures requires understanding how repayments are applied
- Fixed portion restrictions – You may still face break fees if you refinance the fixed portion early
- Not always the best of both worlds – If interest rates remain steady, a split loan may not provide significant advantages
How to decide which home loan type is right for you
Choosing between a fixed, variable, or split home loan depends on your financial goals, risk tolerance, and market conditions. Here are key factors to consider:
Do you need certainty in your repayments?
If you prefer predictability and stability, a fixed-rate loan ensures your repayments won’t change, making budgeting easier.
Are you comfortable with market fluctuations?
A variable-rate loan may be better if you’re open to interest rate changes and want the potential for lower repayments if rates decrease.
Do you want the flexibility to make extra repayments?
Variable loans generally allow unlimited extra repayments, whereas fixed loans often have restrictions or fees for early repayments. A split loan can provide a mix of both.
How long do you plan to stay in the loan?
If you might sell, refinance, or switch loans within a few years, a variable or split loan offers more flexibility. Fixed loans often have break fees if you exit early.
Speak with a mortgage broker
Not sure which loan is best for you? Our mortgage brokers can assess your situation and recommend the right option based on your needs. Whether you’re buying, refinancing, or investing, expert advice can help you make the best decision.
Contact Mortgage Broker Brisbane today to discuss your home loan options. Call our friendly team on 1300 475 525 or reach out online.
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