One of the toughest decisions to make when you purchase a home is whether you’ll choose a fixed or variable rate for your loan. Before you make this choice, it can be helpful to understand how the two options differ and consider the factors that may influence your decision. Here are the key things you should know about a fixed home loan versus a variable home loan.

What’s the difference between fixed and variable?

Before we delve too deeply, it’s important to note the key characteristics of a fixed loan compared to a variable one to understand their differences.  

A fixed rate home loan means that the interest rate of your loan stays fixed at a certain rate for a set period of time. As the borrower, you can choose how long your loan will be set at this interest rate (term lengths can change depending on the financial institution)1. Your loan repayments will stay the same until your term period ends when you will have the option of refinancing at a new fixed interest rate or reverting to the standard variable rate1.

On the other hand, a variable rate home loan means the interest rate will not stay the same and will fluctuate as the market changes. This means your repayments will constantly be different unless the interest rate is unchanged1. Variable rates are calculated depending on the Reserve Bank of Australia’s cash rate, which is used as a way of controlling inflation. Generally speaking, when inflation gets higher, the cash rate will increase, and vice versa2. This will usually be reflected in the variable interest rate, as when the cash rate rises, most financial institutions will also raise their interest rates. 

How to decide

When it comes to choosing which rate is better for you, there are a few factors you may like to consider.

  • Length of loan3: Considering the term of your loan (such as 30 years) tells you how long you can expect to be paying off both the interest calculated on the loan as well as the actual loan (money you’ve borrowed). This could impact your decision as a variable loan, for example, means the interest rate will change many times over the life of the loan, and could see you paying more money in interest. Obviously, no one can predict what interest rates will look like over time, so you can’t make a definitive call, but it’s good to keep this in mind.
  • Risk factor3: Personal preference and how comfortable you are with risks is a major factor that could sway your decision between fixed and variable. If you prefer peace of mind and predictability, you’re more likely to lean towards a fixed rate, as you know your loan repayments will not change until your fixed period ends. If you’re comfortable with risks and aren’t concerned about your repayments frequently fluctuating, you probably won’t have any issues choosing a variable rate.
  • Features and conditions3: There are generally significant differences in the types of features you will get with a variable loan versus a fixed loan. For example, most financial institutions offer uncapped extra repayments for a variable loan, meaning you could pay your loan down quicker. This can often be a feature of fixed loans, though there is generally a limit, usually up to a certain monetary value. Other feature add-ons for variable loans could include the option of an offset account or packages that involve access to everyday transaction accounts. Again, this varies, so each bank will have different offers.
  • Personal and financial situation3: When you’re deciding which rate you prefer, consider what makes you feel most comfortable and how steady your finances are. You may like to weigh up what your likely mortgage repayments will be against your income. It’s also worth keeping in mind that your income will likely change over the term of your loan. That said, you can’t predict the future and need to live within the means of your current financial circumstances, so you should do what will be best for you all-round. 

Understanding the difference between fixed and variable home loan rates is evidently only one part of the equation. It’s also about factoring in your personal thoughts and feelings, financial situation and what will make you feel most confident and comfortable. Keep in mind though that you’re never locked into a variable rate (you can change to fixed at any time) and you only have to remain on a fixed rate for the term you’ve signed on for (which varies between financial institutions).

At Queensland Country Bank, you have two great home loan options to choose from with our current fixed or variable special offers.

 

Special offers are available for a limited time only under the Ultimate Home Loan Package. Review the Home Loans Product Information Brochure and the relevant TMD’s available at queenslandcountry.bank. Normal lending criteria, terms, conditions and fees apply and are available on request.

General Advice Warning: This information is intended to be general in nature and is not personal financial advice. It does not take into account your objectives, financial situation or needs. Before acting on any information in this article, you should consider the appropriateness of the information provided. In particular, you should seek independent financial advice.

 

Sources

1Alasdair Duncan, 2022, Fixed vs variable home loans, Canstar, https://www.canstar.com.au/home-loans/home-loans-fixed-vs-variable/

 

2Mortgage Choice, 2023, Fixed vs variable home loan, https://www.mortgagechoice.com.au/home-loans/loan-types/fixed-vs-variable-home-loan/

 

3Matt Lee, 2022, Fixed and variable rate loans: Which is better?, Investopedia, https://www.investopedia.com/ask/answers/07/fixed-variable.asp