Fixed rate home loans vs. Variable rate home loans

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 and home loan phrases to get your head around, along with different processes and requirements.

To make things a little easier for you, we have several articles and guides on our blog which explain some common banking and home buying terms and processes, and here is another one! 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 few years – 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 interest rates.

When comparing a fixed rate loan with a variable loan you’ve probably noticed that variable loans come packaged with some additional features like redraw facilities and offset accounts. These different features are worth considering when choosing between the two home loan 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.

Fixed rate loans aren't just for owner-occupiers. They can also appeal to investors who aren't looking to pay off their investment property loan quickly, or who value the fixed repayment amounts each month. 

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 on the flip side you’ll pay more if rates increase. You may also find that although this type of loan likely has 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 rate loan like redraw and the 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 too.

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

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.

Talk to us about your home loan

If you'd like to talk to someone about your home loan, give us a call. 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.

Call us on 13 25 77 Book an appointment