Fixed vs variable interest rate home loans

When you're in the market for a new home, choosing the right type of mortgage can be just as important as picking the perfect house. Two common options you'll encounter are fixed interest mortgages and variable interest mortgages.

January 29, 2025

Understanding the pros and cons of each can help you make a decision that fits your financial goals and lifestyle. 

Fixed interest mortgages

A fixed interest mortgage locks in your interest rate for a specific period, typically from 1 to 5 years. This means your monthly payments remain the same throughout the term of the fixed rate.

Pros

  • Predictability: You know exactly what your payments will be, making it easier to budget and plan your finances.

  • Security: If interest rates rise, you won't be affected during your fixed term. This can provide peace of mind during volatile economic times.

Cons

  • Higher costs: Fixed rates are often higher than the initial rate on a variable mortgage because you pay for the stability they offer.

  • Less flexibility: There can be significant fees if you decide to break your mortgage early, such as selling your home or refinancing before the term ends.

Variable interest mortgages

A variable interest mortgage means your interest rate can change based on the movements of your lender's standard variable rate, which is influenced by the broader economic climate.

Pros 

  • Lower rates initially: Variable rates are often lower than fixed rates initially, which can result in lower monthly payments when the rates are steady

  • Potential savings: If interest rates decrease, your payments could go down. Over the long term, you might end up paying less than you would have with a fixed rate.

Cons

  • Uncertainty: Your monthly payments can increase if interest rates go up. This unpredictability can make budgeting harder.

  • Financial risk: In a high-interest rate environment, you might find yourself paying much more than expected, which can strain your finances.

Making the best choice

Consider your financial stability.

  • If you prefer certainty and are risk-averse, a fixed interest mortgage might be the way to go, especially if you feel interest rates will rise in the near future.

  • If you can handle some risk and are looking to save money when interest rates are low, a variable mortgage could be more suitable.

Think about the economy

  • In a low-interest-rate environment that's expected to rise, locking in a fixed rate can protect you against future increases.

  • Conversely, if rates are high but predicted to fall, a variable rate could capture those decreases.

Assess your future plans

  • If you plan to stay in your home for many years, a fixed rate provides long-term stability.

  • If you're not sure where you'll be in a few years, or you're comfortable betting on rate changes, a variable rate offers more flexibility.

Ultimately, the right choice depends on your comfort with risk, your financial situation, and your long-term housing plans. By weighing the pros and cons of each mortgage type, you can choose a path that best aligns with your financial goals and lifestyle needs.

You can also speak to your local mortgage broker for expert advice.

Sources:
moneysmart.gov.au
canstar.com.au
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