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If you’re new to the world of home loans, we know that you may be feeling overwhelmed with all the information you’ve had to take in. There are many different abbreviations and lots of lending phrases to get your head around.

To make things a little easier for you, we have several articles on our website which explain some common banking and home buying terms and processes, and here is another. In this article we’ll compare fixed rate home loans and variable rate home loans and explain the pros and cons of each.

Fixed rate home loans

Fixed rate home loans are loans where the interest rate is set for the fixed term chosen. Loan terms can usually be set between 1-10 years – depending on the lender – and locking in a fixed rate means that your monthly repayments will remain the same for the duration of the term.

So, what are the benefits of a fixed rate home loan? Well, you’re protected against interest rate rises – and we’ve seen a lot of these over the last year – and you’ll know exactly how much you must repay each month. Although this is positive when rates have increased (or are likely to increase further), it also means that if interest rates are reduced your repayments won’t change and you won’t benefit from the lower rates.

When comparing a fixed rate with a variable loan you’ve probably noticed that variable loans come packaged with some additional features like redraw facilities and offset accounts. The different features are worth considering when choosing between the two options, especially as you may be able to make unlimited extra repayments with one, but not the other – and these differences will vary from lender to lender too!

Note: At P&N Bank, the maximum term length available for our Fixed Rate home loan is five years, and there are no establishment or monthly maintenance fees. We also permit additional repayments of up to $25,000 during the fixed term, which is available for redraw on maturity of the fixed term.

Variable rate home loans

Variable rate home loans are home loans where the interest rate can change over time. The interest rate is typically tied to the RBA’s cash rate adjustments and will fluctuate accordingly.

This is great for you if interest rates fall, as it means your minimum repayments will decrease, but you’ll pay more if rates increase. You may also find that although this type of loan may have lower interest rates initially, any fluctuations may mean you actually end up paying more interest over the life of loan, than you would with a fixed rate. 

Just like with a fixed term loan, there will be certain features of a variable loan like redraw and ability to make additional repayments without any penalties, that may suit your financial situation better. The fact you’re not locked into a ‘rate term’ usually means that you’ll be able to refinance more easily and more cheaply than you would with a fixed rate loan.

Note: P&N Bank’s & Basic loan is a no frills, variable rate home loan.

Comparison: Fixed rate vs. Variable rate

  Potential positives Potential drawbacks
Fixed rate You’re protected against interest rate rises. If interest rates drop, you're locked into a rate.
Easier to budget and organise finances with certainty. There’s usually limited access to loan features such as redraw and offset facilities.
Consistent loan repayment amounts. Usually not able to make extra repayments.
  A break fee will apply if you refinance, overpay your loan or sell your property.
Variable rate When interest rates drop, your minimum repayment amount drops too. If interest rates rise you could pay more.
Most variable home loans let you make extra repayments. Your repayment amount will likely change, meaning less budget certainty.
You can refinance at any time. Lenders can change their interest rates independent of RBA cash rate decisions.
Redraw facilities or offset accounts usually available.  

As you can see, there are pros and cons to both types of home loan so it’s important to select the loan that works best for your personal situation and financial circumstances. Speak to a broker or a lending specialist to properly weigh up your options and find the solution that suits you.

If you would like to talk to someone about your home loan, you can call us on 13 25 77. Alternatively, book an appointment to speak with a specialist in branch, online or over the phone. If you have a broker, they'll also be able to assist you.

Credit products issued by Police & Nurses Limited (P&N Bank) ABN 69 087 651 876 AFSL/Australian Credit Licence 240701. Any advice does not take into account your objectives, financial situation or needs. Lending criteria, terms & conditions, fees & charges apply. Rates subject to change. The Target Market Determination (TMD) for products is available on request.