Fixed, variable or split: Which home loan type is right for you?

15 July 2023

Category: Personal

Understanding the different types of home loans can be confusing, especially for first home buyers.

We’ve outlined the differences to help you determine the most suitable home loan type for you.

What is a variable home loan?

Variable home loan rates can change over time and are determined by the official RBA cash rate, or your lender may change the rate. If interest rates decrease, you’ll enjoy a lower repayment amount, however, if interest rates increase, your repayments will also increase.

People choose variable home loans due to the flexibility; you can easily make extra repayments, add an offset account or redraw facility, or refinance.

Pros
When interest rates decrease, your repayments will decrease. Most variable home loans will allow you to make extra repayments, meaning you can pay off your loan sooner. Potential to refinance at any time with another lender. Benefit from redraw facilities or an offset account if available.

Cons
Interest rate is dependent on the current market interest rates and can change at any time. Unpredictable as lenders can change their interest rates independent of the official cash rate. When interest rates increase, your repayments will also increase.

What is a fixed home loan?

Fixed home loans mean the interest rate is fixed for a set period between one and five years. Even if the official cash rate changes, your interest rates and repayments will remain the same for the set period.

The interest rate generally defaults to a variable rate once you reach the end of your fixed-term period, however, you have the option to fix it again on the current interest rate for up to five years, refinance, or roll onto a variable rate.

Pros
Certainty – you’ll be unaffected by interest rate rises during your fixed-term period. Consistent loan repayments are easier to budget for.

Cons
If interest rates decrease, you’ll be locked in at the rate your loan was fixed at. Limited access to loan features, such as 100% offset accounts or the ability to redraw. Little flexibility, meaning you can’t make extra repayments and may be charged extra fees if you decide to refinance or sell your home.

What is a split home loan rate?

You might decide a split rate home loan would suit you best. A split rate home loan allows you to split the total loan value into two loans, one fixed and the other variable.

Essentially, this gives you the best of both worlds so you can have the option to make extra repayments on your variable loan but also know your fixed home loan won’t be affected by changes in rates.

Pros
Greater flexibility on the variable portion of the home loan with access to all of the benefits, such as making extra repayments, offset accounts and a redraw facility. Knowing the fixed portion of your home loan is secure and unaffected by changes in rates. If interest rates drop, you’ll enjoy a lower rate on your variable portion of the loan and lower repayments.

Cons
Not available for all home loans. If interest rates decrease, the fixed portion of your loan is locked into the rate at time of fixing. Less certainty – an increase in interest rates will affect your variable portion of the loan. If you decide to refinance or change loans during the fixed term period, you could be charged extra fees.

Find out how much you can borrow with our home loan borrowing power calculator.

If you need assistance with your home loan enquires, find your local lender on our website, call us on 1300 228 228, or visit your local branch today.