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Home loans explained: Should I get a fixed rate or variable interest rate loan?

Whether a fixed or variable rate loan is better for you will depend on your individual situation. Here we'll walk you through the pros and cons of each option to help you decide which rate type is right for your needs.

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What is a fixed rate loan?

Fixed rate home loans are exactly that, a loan with an interest rate that is fixed and does not fluctuate. This fixed rate means your repayments will stay the same on your home loan for the term of your fixed-rate period.

A fixed rate period can last between 1 and 5 years, depending on your lender. After your fixed period ends, it will typically switch to a variable rate loan.

Speak to one of Lendi’s Home Loan Specialists to discuss your options.

Pros of a fixed rate

  • Predictable repayments. This makes budgeting your finances a lot easier since you can be confident in how much you'll pay each month. This can be useful for first home buyers or anyone following a strict budget after the expenses of buying a home.
  • If the interest rates rise, you will not be affected.

Cons of a fixed rate

  • If interest rates drop, you will not pay less.
  • Break or exit fees apply if you wish to change or refinance your loan with your contracted period.
  • Generally extra repayments cannot be made, or if they can, they will incur a fee.
  • No access to redraw facilities or offset accounts.

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What is a variable rate loan?

A variable rate loan is a loan where the interest rate you are charged can fluctuate at any time as interest rates change.

These rates can rise or fall in accordance with the Reserve Bank of Australia cash rate changes as well as a number of other factors. Recently some lenders have increased their rates due to a rise in their funding costs (simply, the cost of borrowing money).

Most lenders offer a standard or basic variable loan. Standard variable loans offer the flexibility of a variable loan as well as additional features such as offset accounts, redraw facilities and the option to split the loan.

While a basic variable loan offers a variable rate, without the extra features of the standard variable rate loan, meaning it can be a cheaper alternative.

Pros of a variable rate

  • If interest rates fall you'll pay less. This can save you money on not only your monthly repayments, but over the term of your loan as well.
  • The flexibility to make extra repayments. If utilised, this can help you pay off your home loan quicker and minimises the total amount of interest paid over the term of the loan.
  • You can reduce the amount of interest you pay by taking advantage of the redraw and offset account features of the loan.
  • Less hassle switching loans. Depending on your lender, variable rate loans typically do not have break or exit fees.

Cons of a variable rate

  • If interest rates rise, your repayments will increase.
  • Unpredictability of monthly repayments - this can make it hard for borrowers to budget.
  • Potential for mortgage stress - when choosing a variable rate home loan, ensure you are able to make monthly repayments if your interest rate increases.

Use Lendi’s home loan repayment calculator to see how much you can expect to pay if interest rates rise.


Is a split loan the best option?

Split rate home loans can offer the benefits of both fixed rate and variable loans.

A split rate home loan allows you to split your loan into portions and repay one part at a fixed rate and the remaining part at a variable rate.

How split loans work

If you split your loan, one part of your loan will remain fixed and unchanged by interest rate fluctuations, while the other part will be affected if interest rates rise or fall. On this variable portion, you will be able to make extra repayments and also have access to offset accounts and redraw facilities.

You can split your loan 50:50, but the decision is entirely up to you, the borrower. The hardest decision is what proportion you wish to split your loan into. A Home Loan Specialist can help you structure your loan based on your individual needs.

What to know more? Read Lendi’s guide to split rate home loans for more information.

Is a fixed, variable or split rate loan is right for me?

There are a number of things to consider when choosing the type of home loan that works best for you. If you are not sure which of these options is best suited to your situation, discuss your options in more detail with one of Lendi’s Home Loan Specialists for free, expert advice.

Get free expert advice on your home loan

Choose a time for one of our Home Loan Specialists to call you.

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What else can I do to pay less interest?

Offset accounts and redraw facilities are features of a variable rate home loan that can help you reduce the amount of interest you'll pay over the term of your home loan.

How does an offset account work?

An offset account is an everyday transaction account connected to your home loan. Its purpose is to offset the amount owing on your home loan and help reduce the amount of interest you pay.

For example, if you have $20,000 sitting in an offset account and $400,000 owing on your home loan, you will only be charged interest on $380,000.

Keep in mind that most lenders charge an annual fee for an offset account. Use an offset account calculator to find out how much you could save.

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How does a redraw facility work?

Similar to an offset account, a redraw facility can help reduce the interest you pay in a similar way to offset accounts.

Redraw facilities allow you to make extra repayments (above the minimum required amount). The excess payments go into a redraw facility that you may access in times of financial need.

For example, if your required home loan repayment amount is $2,000 per month, and you pay $2,250 each month for a year, you will have $3,000 in your redraw facility.

Depending on your lender, there may be some restrictions such as fees for withdrawing, limiting the number of withdrawals or a minimum amount per withdrawal.

Redraw accounts and offset facilities can be subject to activation and ongoing fees. If the lender fees outweigh the interest saved, then opening one of these accounts may not be in your best interest. Chat with a Home Loan Specialist to see if either of these are a good fit for your situation.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: new purchase, refinance, fixed rate home loans, variable interest, interest rate, first home buyer

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Important legal stuff

Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
# Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
Lendi is a privately owned and operated Australian business. Our mission is to change the way Australians get home loans by providing a faster, smarter and more secure home loan experience designed around the customer’s convenience and needs. Although Lendi compares over 1600 products (2,500+ products including feature and pricing variations) from more than 35 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 35% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors.
*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
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