What Is A Fixed Vs Variable Home Loan, And Which Is Better In Australia?

home loan brokers

Did you know that 37% of Australian homeowners are currently experiencing mortgage stress?

With interest rates constantly fluctuating, choosing between a fixed and variable home loan can significantly impact your financial future.

Both have their benefits and drawbacks, and the best choice depends on your financial situation and long-term goals.

This blog will break down the key differences between fixed and variable home loans and help you understand which might be better for you.

Understanding Fixed-Rate Home Loans

A fixed home loan is where the interest that has been agreed on is not changed for a specified period which may be between one and five years.

This means that your monthly repayments are fixed for a given term meaning that the outgoings are more predictable.

Advantages of a Fixed Home Loan:

  • Stability in repayments: Your repayments will not fluctuate despite the occasions that interests are being adjusted during the fixed period.
  • Easier budgeting: When the bills are paid on a regular basis it is easier to keep your budget.
  • Protection from rate hikes: If interest rates go up, you will remain immune from higher rates for a given time.

Disadvantages of a Fixed Home Loan:

  • Limited flexibility: You do not enjoy reduced interest rates during the period of the fixing of the rate with a line of credit.
  • Break fees: Early payment of the fixed rate loan means that someone will lose a lot of money in the process depending on the kind of fee charged.
  • Restricted extra repayments: permanent loans often cap the additional payment that one can make without being charged some fees.

Understanding Variable Rate Home Loans

A variable home loan has an interest rate that can fluctuate over time, depending on changes in the Reserve Bank of Australia’s (RBA) official cash rate or the lender’s policies.

This means your monthly repayments could go up or down during the loan’s life.

Advantages of a Variable Home Loan:

  • Savings on interest: When the rates go lower, your repayments decrease, which can minimise your expenses.
  • Additional repayments: Flexible loans typically allow you to pay extra amounts over your main payments and may help you pay the loan back earlier in your loan term.
  • Flexibility: You would often discover flexible home loans, full of features like redraw facilities that enable you to get access to the extra amounts you have paid if you need them.

Disadvantages of a Variable Home Loan:

  • Unpredictable payments: The monthly payments increase if the market rate keeps increasing, and you might find it very challenging to budget.
  • Susceptibility to rate hikes: Higher interest rates will result in higher payments.

Fixed vs Variable: Key Differences

To make it easier to compare the two, here’s a breakdown of the major differences between fixed and variable home loans in Australia:

Feature Fixed Home Loan Variable Home Loan
Interest Rate Locked in for a set term (1-5 years Changes based on market conditions
Repayments Consistent, predictable Can go up or down
Extra Repayments Limited or not allowed Unlimited
Break Fees High Low or no more
Offset Account Rarely available Usually available
Best For Borrowers who value stability and want to lock in a rate Borrowers who are comfortable with fluctuations and want flexibility

Key Considerations For Home Buyers

Selecting the right home loan relies on several key factors. Here are some essential considerations:

Financial Stability

  • If you prefer predictable expenses and financial stability, a fixed-rate home loan might be more suitable.
  • If you can handle potential fluctuations in repayments, a variable-rate home loan offers more flexibility.

Market Conditions

  • Consider current and projected market interest rates. If rates are low and expected to rise, locking in a fixed rate could be beneficial.
  • If rates are high and likely to fall, a variable rate may provide savings.

Loan Features

Look for features that suit your lifestyle and financial goals. Some loans offer redraw facilities, offset accounts, and repayment holidays.

Which Is Better For You?

The selection of a fixed rate versus a variable home loan largely depends on your financial condition, your risk appetite, and your long-term ambitions.

Some considerations for you to make up your mind are as follows:

Select a Fixed Rate when,

  • You need certainty over your repayment
  • You operate on a tight budget
  • Do you believe interest rates will hit the roof

Select a Variable Rate when,

  • You require flexibility in your loan 
  • Do you intend to pay extra in the future 
  • You have requirements such as offset accounts

How Home Loan Brokers Can Help?

The decision as to which home loan is to be fixed or variable is vital, and proper guidance is crucial. Depending upon the financial condition of a person, home loan brokers in Melbourne may provide advice keeping your necessities in mind. 

They have access to many lenders and can find the best deal for you. If you need a fixed rate to give you peace of mind or prefer to have the flexibility of a variable loan, a professional broker can guide you through the various options to find the right loan structure.

Still Confused Between A Fixed Or Variable Home Loan?

Finally, only you can decide which home loan is the right one for you. Nevertheless, at LTE Loans, our professional home loan brokers in Melbourne will be able to guide and lead you through every one of them.

We will talk through your financial circumstances with you, help in the explanation of the pros and cons of each option, and help you find the best deal for your needs. Contact us today to make sure you have a home loan offer that really works for you and enjoy peace of mind as you make that next step in your property journey.