Variable and Fixed Home Loan Rates Explained

There are many different home loan options, so it’s important to find the one that’s right for your financial situation. Repaying your mortgage will be a financial commitment for many years to come, so you should understand all the elements involved before taking the plunge

Using a mortgage broker is a useful way to get expert advice in plain English. Here, CHL Home Loans explains the most important things you need to know about variable rate home loans and fixed rate home loans. 

What is a variable rate home loan?

Standard variable rate home loans are the most popular loan type in Australia. As the name suggests, a standard variable rate home loan has an interest rate that can fluctuate. This generally moves up and down in line with changes the Reserve Bank of Australia (RBA) makes to official interest rates – although a bank can make the decision to change its rates independently.

The benefits of a variable rate home loan

Standard variable rate home loans come with a greater range of options and greater flexibility than a fixed rate loan. For example, you can often redraw or make additional payments at no cost with this type of loan, which means you may pay off your home loan sooner and may pay less interest overall.

Home loan features 

Mortgage offset accounts are another popular feature of variable rate loans. A mortgage offset account is a type of lending arrangement where you maintain a savings account and a home loan with the same lender. Instead of receiving interest on the savings account, the interest on your home loan is calculated on the net balance of the loan less the amount you have in your savings account.

These different features and potential money-savers are why standard variable rate home loans are so popular. However, there are reasons why another loan type might be better for you.

The downside of rate changes

As variable rates typically go up and down, when you have a variable home loan it’s important to ensure you have enough flexibility in your financial situation to absorb the extra costs of a potential rate increase. This may make budgeting more complex, and not everyone will be in a position to operate with this small degree of uncertainty.

Typically, in economies where interest rates are expected to increase, variable rate home loans become less popular.

What is a fixed rate home loan?

While it offers interest rate security and predictable payments, does a fixed rate home loan fit your budget and lifestyle?

A fixed rate home loan is a type of mortgage product featuring a locked interest rate for a set period of time – usually from one to five years, according to MoneySmart. Unlike a variable or introductory rate loan, the interest rate and repayments on fixed-rate loans don’t fluctuate with the market, making them an attractive option to many home buyers.

What are the advantages of a fixed rate loan?

The ability to lock in a favourable interest rate plus knowing exactly how much you’ll be paying back every month are the main advantages of choosing a fixed home loan.

For example, let’s say you’re comparing a 30-year, $500,000 loan at a fixed rate of 4.5% against a 4% variable rate loan. While the payment on the variable rate loan would be lower initially ($2,533 versus $2,387), even a 2% increase would cause your monthly payment to jump by an extra $611 every month.

For those with less flexibility in their monthly budget, a fixed rate home loan can offer greater control and peace of mind.

What are the disadvantages of a fixed rate loan?

Although fixed home loans have better payment predictability, there are a couple of trade-offs:

  • Less payment flexibility. Unlike variable rate loans, most fixed-rate loans won’t allow you to make extra repayments or exit the loan early (for example, if you sell your house) without incurring a penalty.
  • You’re locked in. With a fixed rate loan, you won’t benefit from falling interest rates.

Who is best suited to a fixed rate loan?

Fixed rate loans can be a good fit for:

  • first home buyers
  • families juggling multiple expenses
  • investors who require predictable financing costs.

What are split home loans?

If you’re on the fence about a fixed or variable rate loan, a split rate home loan may give you the best of both worlds by allowing you to split your mortgage into a fixed rate portion and a variable rate portion. With a split home loan, your payment won’t fluctuate as dramatically when interest rates rise or fall.

One advantage split home loans have over fixed loans is that you can make extra repayments on the variable portion, which can help reduce the overall cost of your mortgage. However, the fixed portion will still be subject to early exit fees.

Get the right advice

Before you settle on which loan type is right for you, talk to one of our qualified mortgage brokers about your options. Take the time to consider what type of loan will best suit your situation. If you need help navigating the sometimes confusing home loan system, a CHL Home Loans broker is available to support you and talk you through the different options available.


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