• Fixed vs variable interest rates - what's the best option?

    Whether you opt for a fixed or variable interest rate will depend on several factors. Find out what works best for you thanks to RAMS' practical analysis.

  • A fixed rate home loan means the interest rate stays the same for a set period of time. You’ll have the security of knowing what the repayments are during the fixed rate period, so you can budget accordingly.

    Conversely, with a variable rate home loan, the interest rate can change, which in turn impacts your repayments. While interest rates may often move in line with the Reserve Bank’s movement of the official cash rate, a lender can change its variable interest rates at any time. 

    Then again, you might want a combination of both and split your home loan to make it part fixed and part variable.

    Fixed rate home loans – the positives  

    • Most fixed rate home loans offer redraw facilities.
    • Borrowers know what repayments will be for the duration of the fixed rate period, so can budget accordingly.
    • Fixed rate home loans are not affected by the interest rate market during the fixed rate period.  

    Fixed rate home loans - the negatives  

    • Most fixed rate home loans allow limited extra repayments during the fixed rate period.
    • Lenders usually charge fixed rate break costs if you prepay more than a predetermined threshold during the fixed rate period. These break costs can be considerable. 
    • If you wish to change your home loan during the fixed rate period or sell your home, you may also need to pay fixed rate break costs. 
    • Be aware that while you might be ‘in front’ when fixed interest rates may be lower than variable rates, there may be a time when your fixed rate is higher than the variable rate dependant on interest rate fluctuations. 
    • Offset accounts are often not available with fixed rate home loans. An offset account is a non-interest earning account where the balance is offset against the home loan to reduce the total interest payable. 

    Variable rate home loans - the positives  

    • Variable rate home loans generally give the borrower more flexibility (greater choice with payment frequency and amount).
    • Variable rate home loans can include extra features generally not offered by fixed rate loans, including offset accounts.  

    Variable rate home loans - the negatives  

    • As variable rate loans are subject to interest rate fluctuations, monthly repayments can change with each shift making budgeting less exact.  

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  • Disclaimer:

    While such material is published with permission, RAMS is not responsible for its accuracy or completeness.  This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.