A simple guide to fixed vs variable home loans

Interest rates are always a hot topic of conversation among homeowners and homebuyers alike. With rates on the move, it’s more important than ever to stay informed.

Home loan interest rates are largely driven by the state of the wider economy. The Reserve Bank of Australia sets the national cash rate in line with economic performance and outlook. This then contributes to the home loan rate environment available to borrowers.

Understanding rising interest rates

For the past several years, Australia has experienced a borrowing environment like never before. Rates hit all-time lows, and only recently started to lift as a result of a stronger economic recovery from the Covid-fuelled recession. The rate rises we’re seeing in 2023 are reflective of a sharp increase in CPI (Consumer Price Index) and core inflation. This has prompted a response that attempts to stabilise an otherwise booming economy.

Establishing which home loan is right for you depends on several factors. These include your personal financial situation, your future goals and plans, and the balance of your home loan.

Variable rate loans

Variable rate loans carry an interest rate that fluctuates in line with internal and external factors.

The good things about variable rate loans

● Flexible. Variable loans offer additional flexibility in that they give you freedom. Freedom to make additional repayments or increase the size of your home loan for renovation plans.
● Benefit from rate cuts. If rates fall, your variable rate may fall too, saving you money on interest immediately.

Things you need to consider about variable rate loans

• Impact of rate increases. In a rising interest rate economy, those on variable rates will experience regular hikes to their monthly outgoings, as rate rises will be reflected in your monthly repayments.
• Uncertainty around expenses. The unpredictability of a variable rate gives little certainty around expenses, making and can make things like monthly budgeting more difficult.
  Fixed rate home loans

Fixed rate loans carry a fixed interest rate for a set period of time, for example a 4% rate fixed for two years.

The good things about fixed rate loans

• Certainty around your expenses. Rising inflation can cause a ripple effect on the cost of living for everyday Australians. Fixing your interest rate can give you certainty around what you’ll pay for a defined period of time, usually 1-5 years.
• Protection from rate rises. When your rate is fixed, you’re protected from external factors that cause variable rates to rise. In a fast-paced economy where rates are continually rising, fixing at a low rate can mean substantial savings.

Things you need to consider about fixed rate loans

• Less flexibility. Fixed rate loans often carry penalties for overpayments or making additional repayments, and break fees if you want to refinance or sell your property.
• Revert rate. Some fixed rate loans revert to a high variable rate product at the end of the fixed term, which increases your loan repayments. It’s important to confirm what rate will apply at the end of the fixed rate term.
• No access to rate reductions. Protection from rate rises comes at a cost – rates could fall, too, which can leave fixed rate mortgagees paying more interest than if they hadn’t fixed their loan.

Split fixed and variable home loans

To benefit from the upsides of fixed and variable loans, some borrowers opt to split their loan into a fixed portion and a variable portion. The fixed loan offers an element of certainty around repayments, while the variable portion can be used to make additional repayments.

Choosing between fixed or variable

Deciding whether or not to fix your home loan depends on your personal circumstances and your future goals and plans.

Adelaide Bank Senior Manager Consumer Lending Products, Kimberly Bee, explains that customers need to consider how long they plan to be in a property, or any foreseeable changes to their circumstances – particularly when considering a fixed term loan.

“Whilst a fixed rate gives a customer certainty of the interest and repayments, a fixed rate loan may not provide the same flexibility of a variable loan. There are generally early repayments or break costs fees payable if you pay too much in extra repayments or need to close the loan (e.g. marital split or refinance), meaning that the loan is less flexible than a variable loan. These fees can be significant.”

You’ll also need to consider whether you can benefit from other home loan features, as this may inform your decision between fixed and variable. “Many banks do not offer an offset facility on fixed rate loans, however Adelaide Bank offers 100% offset for both variable and fixed rate loans,” Kimberly explains.

Another important consideration is the broader economic environment. Establishing whether you can absorb the additional cost of rising rates is important in choosing between fixed and variable loans.

If you'd like to talk to us about your current home loan please contact us on 1300 788 730 between 8am and 7pm Monday to Friday, or Saturdays between 9am and 4pm (CST).