Fixed vs variable rates: which is better, and can you have both?

To fix or not to fix; it’s a question that every home loan borrower will need to answer. So, is a fixed rate or a variable rate home loan better? And is it possible to have both?

The interest you pay on top of your home loan amount is one of the biggest factors affecting the cost of the loan, so it’s understandable you want to choose your interest rate carefully.  

Let’s explore the benefits and risks of both home loan interest rate types, which one may better suit a low or high-rate environment, and how you can split your interest rate too.

The benefits of fixed rate home loans

Pros of a fixed rate home loan

• Stability in your budget
• Avoid market fluctuations

Homeowners typically seek out fixed rate home loans for one of two reasons: for stability in their budgeting and to avoid the impacts of a fluctuating market.

Over a 25-30-year home loan term, it’s safe to assume interest rates will fluctuate. By locking in your interest rate for a set period (typically 1-5 years) you can ensure that your rate will not change in that time.

By fixing your interest rate you can avoid the sting of a cash rate hike by the Reserve Bank of Australia (RBA). That means that your home loan repayments will be the same for the duration of the fixed period. This can be a helpful option for those who like to know exactly how much to budget for each mortgage repayment.

Plus, home loan lenders can hike interest rates out-of-cycle (even fixed rates for new customers when banks suspect a rate hike is on the horizon). Fixing your home loan ensures your repayments remain safe from market changes for that fixed period. 

It’s worth keeping in mind that if you want to refinance from a fixed rate home loan, you’ll likely need to pay costly break fees for the privilege. Refinancing can be a much more expensive exercise for fixed rate customers. 

When should you consider fixing your home loan rate? 

When you need stability in your budget, or when you suspect interest rates may rise (however this is not a guaranteed way to avoid higher interest). 

The benefits of variable rate home loans 

Pros of a variable rate home loan  

• More likely to come with features
• If rates fall, so should your repayments

A variable rate home loan may be a competitive choice for some homeowners as they are more likely to come with features, and you’ll be in a better position if the cash rate is cut.

A significant portion of fixed home loans do not come with flexible features, like an offset account, redraw facility or the ability to make extra repayments. These features offer serious benefits to customers, including the ability to chip away at your loan principal faster or reduce your interest charges.

And while a fixed rate may protect you from rate increases, a variable rate may allow you to benefit from cuts to the cash rate. If the RBA were to cut the cash rate and your lender passed this decrease on to you, you’ll shortly see the impacts in the form of lower repayments. Whereas, if you were locked into a higher fixed rate, you may be waiting months, if not years, to see relief in your home loan repayments.

In this way, a variable rate home loan can be seen as more of a ‘gamble’ than a fixed rate, but it can offer greater reward if rates fall. So, it’s worth following the news and keeping abreast of interest rate discussions so you can track how the market will move and plan accordingly.

When should you consider a variable home loan rate? 

If you are prioritising features and flexibility (although some fixed rate loans do offer these), if you think rates may fall, or if you aren’t worried about fluctuating interest rates.

Can’t decide between fixed or variable rate? Consider split rate home loans

Sometimes the market is too hard to predict, or you may want the best of both worlds, including fixing your rate and getting access to an offset account. This is where a split rate home loan may come in handy.

As the name suggests, a split rate home loan involves dividing the interest charged on your home loan into a fixed rate portion and a variable rate portion. This does not have to be a 50/50 split. Instead, you could opt for a 65% variable home loan and 35% fixed home loan, for example.

By choosing a split rate home loan you may be able to secure some of your mortgage repayments and protect them from rate fluctuations. And if rates rise, you won’t feel the impact as significantly as if you were on a 100% variable rate loan. Not every home loan offers the ability to split your rate, so be sure to compare your options and check the terms and conditions before applying.

Keep in mind that there is more to a home loan than the interest rate you pay. You want to also ensure you’re comparing fees, features and the benefits offered by that lender as well. 

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