Fixed or variable home loan: which is right for you?

Choosing to go with a home loan that comes with a fixed or variable rate of interest will depend upon your personal and financial circumstances.

When taking out a home loan, one of the biggest decisions you’ll need to make is what type of loan to take out.

Fixed and variable interest rate home loans both offer unique advantages and certain conditions that can impact your decision, depending on your personal and financial circumstances.

Here are some of the key factors to consider when working out which type of home loan is right for you.

Advantages of a fixed rate home loan

The main advantage of a fixed rate home loan is certainty. You can lock in or ‘fix’ your interest rate for a certain period of time – typically between one and five years – and plan for the future, knowing that your repayments will stay the same during that time.

With Fixed Rate Home Loans, when the fixed term ends your loan will usually automatically roll over to the applicable standard variable rate, or you can choose to refix your home loan.

Key points:

• Lock in your interest rate so you know what your repayments will be

• Set weekly, fortnightly or monthly repayments

• Protect yourself against interest rate rises

• Plan for the future and set financial goals with confidence.

Things to consider about a fixed rate home loan

A fixed rate home loan is not as flexible as a home loan with a variable rate. This may be worth keeping in mind if you think your financial situation is likely to change in the future.

Key points:

• With Fixed Rate home loans you can only make minimal in additional repayments per annum without incurring an early repayment adjustment (check with lender)

• You cannot redraw any additional repayments you’ve made during the fixed rate period

• There may be an early repayment adjustment for paying your loan out early

• You won’t benefit from any future interest rate falls

• Doesn't always provide access to an Offset account

• No access to features like top-ups.

Advantages of a variable rate home loan

If you’re looking for flexibility in your home loan, a variable rate home loan may be better suited to you.

With a variable rate loan, your interest rate can rise or fall throughout the term of the loan. The interest rate a bank offers can be affected by a number of factors, including in part the official cash rate set by the Reserve Bank of Australia (RBA) as well as higher or lower funding costs for the lender.

Key points:

• With variable rate home loans, you can make unlimited repayments

• You can also make unlimited redraws on any additional repayments you’ve made on the Standard Variable Rate and Extra home loans.

• You can link one or more Everyday Offset accounts to an eligible Standard Variable Rate home loan. Any money you have in your Everyday Offset account(s) will reduce the balance on which we charge interest on your Standard Variable Rate home loan.

Things to consider about a variable rate home loan

A variable rate home loan can help you repay your home loan sooner by taking advantage of falling interest rates and continuing to pay the same repayments when rates fall. But if interest rates go up, your lender may increase your repayments.

Key points:

• Your repayments may increase if rates go up

• It can be harder to budget for the future as you can’t be sure how interest rates might move

Splitting & switching your loan

You can choose to split your home loan, by nominating a proportion of the loan as fixed and a proportion as variable. This means you have the certainty of a fixed rate on part of your loan as well as the flexibility to make extra repayments on the variable rate part of your loan.

Soucrce Commonwealth Bank

This information has been prepared by PHA Financial Services and does not take into account your objectives, financial situation or needs. Before acting on this information you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The information provided was accurate at the time of publication and changes in circumstances after a document is published may impact on the accuracy of information. Some information may have been collated from various third parties and we make no assertion that the information was originally ours.