Choosing the right home loan is one of the most important financial decisions you’ll make—and the type of interest rate you select can have a big impact on your repayments and long-term costs. The two main options are variable-rate and fixed-rate mortgages, each with its own pros and cons.
Here’s a breakdown of how they work, their key differences, and how to decide which one suits your financial situation.
Fixed-Rate Mortgages
A fixed-rate mortgage offers the security of a locked-in interest rate for a predetermined period, typically between one and five years. During this time, your repayments remain unchanged, shielding you from market fluctuations and providing peace of mind for budgeting. This can be particularly beneficial for first-time buyers or those on a strict budget who need predictable monthly expenses.
However, this stability comes with trade-offs. If interest rates fall during your fixed term, you won’t benefit from the lower rates, and you may end up paying more than you would with a variable loan. Additionally, fixed-rate mortgages often come with restrictions—such as limits on extra repayments or penalties for refinancing or selling before the fixed term ends. If you value certainty over flexibility and believe interest rates are likely to rise, a fixed-rate mortgage could be the right choice for you.
Variable-Rate Mortgages
Unlike fixed-rate loans, variable-rate mortgages fluctuate in line with the market, meaning your repayments can increase or decrease depending on economic conditions and decisions by the Reserve Bank. The main advantage of a variable rate is the potential to save money if interest rates drop, as your repayments will decrease accordingly. These loans also tend to offer more features, such as offset accounts, unlimited extra repayments, and redraw facilities, making them ideal for borrowers who want to pay off their loan faster or maintain financial flexibility.
The downside is the uncertainty—if rates rise, so will your repayments, which can strain your budget. Variable-rate loans require a level of comfort with financial risk, as your monthly costs could change at any time. They’re best suited for those who can absorb potential rate hikes, plan to sell or refinance in the near future, or want to take advantage of features that help reduce interest over time.
Which Mortgage Type is Right for You?
The decision between fixed and variable rates ultimately depends on your financial goals, risk tolerance, and future plans. If you prioritise stability and predictability, a fixed-rate mortgage may be the better option. If you’re comfortable with some uncertainty and want the potential for savings and flexibility, a variable-rate loan could suit you well.
Ready to Find Your Ideal Home Loan?
Every borrower’s needs are unique. Contact us today to discuss whether a fixed or variable mortgage aligns with your financial future. We are here to guide you toward the right decision for your homeownership journey.
