Fixed vs Variable Rate Home Loans and What’s the Difference?

Paul Hill Realty Hope Island is dedicated to assisting clients with Property Sales and Property Management across the Northern Gold Coast.

As part of our commitment to keeping you informed, we want to share this 2-part article. The first part is on ‘Interest Rates and How they Work’, and in the next article we will cover ‘Fixed vs Variable Rate Home Loans and What’s the Difference?

Fixed vs Variable Rate Home Loans: What’s the Difference?

Home loans come with a fixed interest rate or a variable interest rate, and you are free to choose which one suits you.

If you opt for a fixed-rate home loan, your interest rate is locked in for a defined period, typically anywhere from 1 to 10 years or longer. This is called the term of your loan, and the interest rate will remain the same throughout the term.

If you opt for a variable rate home loan, the interest can change—go up or down—over time. This is usually based on the RBA’s cash rate, which lenders use as a guide for the rates they charge you, their customer.

There is also another type of home loan, called a split loan, which has a portion of the loan which is variable and a portion which has fixed interest.

Let’s now look at each type of Home Loan in more detail.

What is a Fixed Rate Home Loan?

A fixed rate home loan is exactly what it says: during the term of your loan—whether it’s 1, 2, 5 or 10 years—the interest rate is fixed, which means your loan repayments stay the same every month.

When the term of the loan ends, the rate reverts to a variable interest rate, though you are free to negotiate another fixed rate term. You can also shop around and move to a new lender who may be offering a better deal.

In terms of features like offsets and the ability to make extra repayments, fixed rate home loans tend to offer fewer options than a variable rate.

Example: Using the same figures as above, if you had a home loan of $500,000 with an interest rate of 2.33% p.a. you would be paying $2,211 every month for the full term of the loan.

What is a Variable Rate Home Loan?

If you choose a variable rate home loan, your regular repayments can go up or down depending on interest rate changes. This gives you less certainty than a fixed rate loan, but variable rate loans do come with more features and flexibility. Typical features include the option for extra repayments, a redraw facility or an offset account, where your savings help to reduce the interest you pay.

Example: a fluctuating interest rate can make a substantial difference to the monthly repayments of a $500,000 home loan over a 25-year loan term:

On a home loan with an interest rate of 2.00% p.a. your monthly repayments would be $2,129 per month
On a home loan with an interest rate of 2.33% p.a. your monthly repayments would be $2,211
On a home loan with an interest rate of 3.00% p.a. you would be paying $2,381 per month

Like any financial product, each option has its unique upsides and downsides to consider.

Pros and cons of fixed and variable rate home loans:
Take the time to consider the pros and cons of each interest rate option before you sign up for a home loan. As we have seen from the calculations in the examples above, a small difference in the rate can add up to a lot over time.

Fixed Rate Interest: Pros and Cons

Pros

Level of certainty about your repayments
You could save money if interest rates go up.
Easier to budget

Cons

Fewer features available
Less flexibility to make additional repayments
Miss out on any cuts to interest rates

The most obvious benefits of a fixed-rate home loan are:

The certainty you have about your repayments. You know exactly how much you’ll be paying each month.
Easier to budget accordingly.
This could end up saving you money if interest rates go up during the term of your loan.

On the downside, the cons you need to be aware of include:

Fewer features available, like offset accounts or redraw.
Less flexibility to make additional repayments.
Break fees apply if you want to refinance, sell your property, or pay off your loan in full.
You miss out on any cuts to interest rates.

Variable Rate Interest: Pros and Cons

Pros

Lower repayments if interest rates drop.
The ability to make additional repayments
Flexibility of additional features like offset accounts.

Cons

Your repayments will rise if interest rates rise
The unpredictability of rates could impact your cash flow

The most obvious benefits of a variable-rate home loan are:

Lower repayments if interest rates drop.
The ability to make additional repayments and pay your loan off sooner.
The flexibility of features like offset accounts and a redraw facility.
Switch to a different lender with no break costs.

On the downside, the cons you need to be aware of include:

If interest rates rise, your repayments will rise.
This unpredictability could impact your cash flow.

You maybe interested in the first article in this series – Your Mortgage Interest Rates and How they Work – https://www.paulhillrealty.com.au/tips-and-ideas/your-mortgage-interest-rates-and-how-they-work/

Looking for a Reputable and Professional Real Estate Agent on the Gold Coast?

Remember experienced property managers can save you time, money, and headaches.

If you are looking for an experienced property manager with your best interests at heart – look no further than Paul Hill Realty Hope Island! You won’t find a team that is more respected, reliable, and trusted in residential property management.

Paul Hill Realty office is located at Hope Island, we manage residential properties anywhere on the Northern end of the Gold Coast. Paul Hill Realty Hope Island is your best choice in property management and Sales.

Learn more about Paul Hill Realty Property Management Hope Island – click here.

Get in touch with one of our property managers at Paul Hill Realty Hope Island by calling 07 5577 1888.

Disclaimer: Blogs are written expressly for education purposes and content is based on the opinions of the authors or as otherwise cited. This information does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.