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Are you buying your first home or looking for a second property? Deciding between a fixed, variable, or split home loan rate? Home loan rates and understanding the different types can be confusing, so that’s why we’ve taken a closer look at each and outlined the differences to help you determine the most suitable 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 may change as your lender makes changes. 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.

Let’s review the pros and cons:

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 of between one to five years. This means that 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. Let’s look at the pros and cons of a fixed home loan:

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?

Now that we’ve gone through both fixed and variable home loans, you might decide that a split rate home loan will 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. Let’s take a look at the pros and cons.

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 therefore 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.

We hope this break down of the different home loan types has helped you understand which home loan might be best for you!

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


Important information

Information on this website is general and has been prepared without taking into account your objectives, financial situation or needs. You should consider whether this information is suitable for your objectives, financial situation and needs before acting on the information provided.