A variable interest rate home loan is a loan where the interest can change from one month to another. In a stable economic environment these changes should be quite moderate but you always run the risk of increases in interest rates and these can increase significantly over the life of your loan. On a positive note rates also can go down and in this instance you do get the benefit.
A fixed rate home loan on the other hand is a loan where your interest rate is fixed for a certain period of time and during this period, your interest will not change no matter how rates move in the market or what changes the Reserve Bank apply.
Both loan options have their advantages but which one will work for you is mainly dependent on your situation.
Fixed rate home loans have the advantage of minimizing your risk and avoiding any unexpected rate increases. The downside is that you won’t get the benefit of any further rate reductions. Fixed rate home loans also make it more difficult to switch lender as they can have high break costs.
What do you gain by fixing your home loan?
Interest rate rises don’t matter. If the RBA chooses to increase their cash rate it makes no difference, if the banks increase their interest rates it makes no difference – you know how much you need to pay every single month.
Makes it easier to budget. With predictable monthly repayments, a fixed rate home loan makes it easier for you to budget your income. Whereas the variable rate option keeps you on your toes as you are unsure whether the rates will rise or drop which might impact negatively on your finances.
What benefits come with choosing a variable rate home loan?
A drop in interest rates is always welcomed. If rates fall you pay less and when the economy is not performing as well as the it should rates often go down.
Make extra payments. One of the main advantages of the variable rate loan that sets them apart from their fixed rate counterpart is the ability to make extra repayments at no cost. This feature enables you to clear your loan in a shorter period of time in case you run into unplanned cash.
With interest rates at an all time low, no Australian can accurately predict how home loan interest rates will move. If you enjoy the flexibility of making free extra repayments in the shorter term then a variable rate home loan is good for you but if you are happy paying the amount on a fixed rate loan and you don’t need this kind of flexibility, a fixed rate loan is a reasonable option for you.