Fixed rates home loans allow your interest rate to be locked in or fixed for a certain period.

With a variable interest rate home loan, the interest rate will change if either the bank or the lender adjusts their interest rates, or if we see a change from the RBA.

Example:

A variable home loan of$400,000 with a 4% interest rate, would mean that you pay off $440 per week, of both principal and interest.

If the interest rate rises to 5%at some point in the future, your weekly repayments would change to $495.

A fixed rate loan of $400,000with a 4.5% interest rate means your repayments would be fixed at $470 per week for a period of 2-5 years.

Fixed rate Loans

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Advantages

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• You have certainty regarding how much your weekly or monthly loan repayments are going to be. That can make things a lot easier when you are trying to budget.

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Disadvantages

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• If interest rates fall, you will end up paying more with a fixed-rate home loan.
• Fixed rate loans are relatively inflexible. If you change your mind or want to refinance, you could end up paying a few thousand dollars to break your fixed rate loan.
• Fixed rate loans only last for a certain period of time – typically 2-5 years. After they expire, a fixed rate loan is likely to toswitch back to a standard variable loan.
• Often, it is not possible to get an offset account with a fixed rate home loan.

VariableRate Loans

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_Advantages

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• Loans that have very low interest rates as an introductory offer, will often be variable home loans.
• Variable home loans come with other features such as redraw facilities or offset accounts, which can end up saving you far more money in the long run.
• Variable rate home loans can be paid off with no penalties.

Disadvantages

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• If interest rates rise you will pay more with a variable home loan.

Fixed versus variable: Which one is right for me?

The main question you need to ask, when deciding on fixed or variable, is how much certainty you want.

If you are convinced that interest rates are going to rise in the near future, and you want certainty in terms of your repayments, then fixed might be an option to consider.

If you are happy with interest rates changing over time and want to make the most of other features, like offset accounts, introductory offers and the ability to easily refinance or change loans, then variable might be the better option.

If you are still not sure, there is also the option of fixing a portion of your loan, while leaving the balance with a variable rate.

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