Should you get a fixed rate or variable rate home loan? Pros and cons

One of the main decisions borrowers make when comparing home loans is whether to opt for a fixed interest rate or a variable interest rate. 

These interest rate types can have different advantages and impacts on home loan costs. But how do you know which is better for you? 

Let’s get into the key facts and traps to know. Fixed vs. variable: which interest rate is best?

First, some quick definitions. What are the three main types of home loan interest rates? 

• A variable interest rate changes at the home loan lender’s discretion. 
• A fixed interest rate stays the same for a set amount of time, called a fixed term. In Australia, the maximum fixed term tends to be 5 years.
• A split home loan uses both variable and fixed interest rates to calculate your interest payment. For example, 60% of your interest rate payment could be fixed – the rest would be variable.

Now we’ve defined our terms, let’s get into them in more detail.

The majority of home loans in Australia use variable interest rates. This is because variable home loans have more flexibility and interest-saving features than fixed home loans.

Pros of variable home loans

Variable home loans come with features designed to save the borrower money. These can include:

• Offset accounts. Offset accounts are savings accounts that ‘offset’ the loan balance remaining, saving borrowers interest on mortgage repayments. 
• Free extra repayments. Extra repayments let borrowers pay off their principal, which decreases their debt and interest owed over time. 
• Redraw facilities. Redraw facilities let you dip back into extra funds you’ve put towards your home loan. 

Because variable interest rates can change over time, too, they also drop when official interest rates decrease – i.e. when the Reserve Bank of Australia (RBA) cuts the cash rate. This can give you significant potential savings on monthly repayments. 

Variable mortgages can also be easier to refinance, though this will depend on the lender and loan discharge fees. 

Cons of variable home loans

Unfortunately, variable interest rates are susceptible to rate hikes. If the RBA increases the cash rate, mortgage lenders pass these added costs to borrowers. Even a 0.25% rate hike can add a hundred dollars to your monthly repayments.

All the extra features you get with variable home loans may also come with additional fees or usage conditions. Read the product disclosure statement (PDS) and target market determination (TMD) to see if a home loan has these T&Cs. 

Are variable home loans better?

Variable home loans can be great for borrowers seeking flexibility, but they’ll need to compare home loans to find the best deal for them.

Rate hikes are an added uncertainty. Can your household budget absorb the increase in payments if rates rise by 0.25%? 1%? 3%? This is something important to know. 

Fixed interest rates don’t make up the majority in Australia, but they’re still an important option to consider when comparing mortgages. This is mainly because fixed home loans can be the ultimate shield against rate hikes. 

Pros of fixed home loans

Interest-saving features like offset accounts and redraws are pretty rare for fixed rates. This is because the fixed rate is already a savings feature.

Fixed interest rates don’t change during the fixed term, typically 1 to 5 years in Australia. Not only does this protect you from rate hikes, but it gives you greater budgeting certainty, especially if you’re already juggling new homeownership costs. 

Once the fixed term expires, you can roll onto a variable rate or fix it again. 

Cons of fixed home loans

Fixed home loans tend to have higher interest rates than variable home loans, but this will depend on the loan, lender, and borrower type. Compare fixed home loans to see which deal could be best for you.

Fixed home loans can also be significantly harder to refinance, especially if you want to leave before the fixed term expires. Breaking a fixed-term early comes with break costs – and these fees can be steep.

Are fixed home loans better?

Fixed home loans can be great for borrowers who want consistent mortgage repayments. Just keep in mind this certainty comes with relative inflexibility and (typically) higher interest rates, as well as a break cost if you want to leave early. 

Here are the pros and cons of fixed vs. variable home loans, laid out simply. 

Keep in mind these pros and cons are general. You may be able to find individual home loan deals that break the mould.

The best home loan for you depends on your wants, needs, and situation. Variable rates suit borrowers who want flexibility (and can also flexibly absorb changing costs), while fixed rates suit borrowers keen to have a consistent and stable budget.

You can compare home loan interest rates in our home loan comparison hub, or the table below.