Fixed vs Variable Home Loan: How to Choose Wisely

The finance world can be daunting - particularly when it comes to home loans and taking out your first mortgage. You’ve saved up for a deposit and are ready to start house hunting when the question arises about home loans. You hear the words “fixed” and “variable” and wonder what on earth it means for you. Sound familiar? You’re certainly not alone. Before U Loan exists to help Australians just like you understand how each loan works, and which is most appropriate depending on your financial situation.

Use our simple guide to understand each interest rate and whether they are right for you.

Fixed Rate Home Loans

A fixed loan is exactly what it sounds like. The lender will lock in the interest rate you will pay on your home loan over a fixed period of time, regardless of market fluctuations.

With this option, borrowers can choose the length of a fixed rate term - usually between 1 and 10 years - and a course of repayments is pre-determined based on how much you can afford.

A fixed loan provides security that these payments will not change, regardless of rises or dips in the market. Fixed interest rates are beneficial for borrowers who prefer stability and want to safely budget how much they will be paying every month.

Positives of a fixed home loan 

• Stability in knowing exactly how much you’ll be paying each month
• You can choose the length of repayment terms
• Enables you to plan ahead and budget for the future
• Won’t be affected by rising interest rates

Potential negatives

• You won’t benefit if interest rates fall
• You can’t make extra payments to pay off the loan faster (break costs can apply)
• No offset accounts to reduce interest rates 

Variable Rate Home Loans 

A variable rate home loan means repayments are determined by the dynamic, fluctuating interest rates. This means that you could pay higher or lower rates throughout the course of your loan term, depending on changes in the market. 

A variable rate loan also allows you to make extra payments in order to pay the loan off faster and reduce overall interest paid. 

This is a good option for borrowers who have financial security, a good understanding of current and future market trends, and confidence that interest rates will decrease.

Positives of variable home loans

• Can provide lower interest rates if market conditions work in your favour
• You have the flexibility to make extra payments to pay off the loan quicker
• You could make long-term cost savings
• It’s easier to switch loans if you find a better deal

Potential negatives

• You could pay much higher interest rates if market conditions are volatile
• It may be harder to budget for the future

How to Choose Which Loan is Right for You?

Choosing which loan will be most beneficial to you can be a difficult decision and there is a lot  of information to take in. Here are five questions you should be asking yourself:

1. What is my financial situation and how much can I afford?
2. What are my long-term goals?
3. What is my tolerance to risk?
4. Do I want security or flexibility?
5. Am I confident interest rates will fall? 

If you prefer stability and aren’t confident in the interest rate market, a fixed rate home loan is probably the best option for you.

But if you have more financial security, are confident interest rates will be low and want the flexibility to pay your loan off quicker, you could choose a variable rate.

Can’t Decide? Split Home Loans Could Be For You

Some lenders will allow you to divide your home loan into fixed and variable portions. This lets you enjoy the security of fixed rates while benefitting from potential savings if interest rates drop.

Let say you choose for a 50:50 split home loan, your loan will be divided into two parts - one with a variable rate and the other fixed - and you can reap the benefits of both.

However, this isn’t possible for everyone because some lenders don’t allow splits. Extra fees could also apply if you already have a fixed rate loan.

How Before U Loan Will Help

If you are unsure which home loan is right for you, one of our expert mortgage brokers is here to advise you.

We’ve helped thousands of Aussies understand their loan options and encouraged them to make informed decisions about what’s best for them based on their individual financial situation and long-term goals.

Find a broker who can answer all your home loan questions and guide you to find the right.

Submit an enquiry using the form on this page or email info@beforeuloan.com.