When it comes to choosing between a fixed rate versus a variable rate for your home loan, it’s a good idea to factor in the benefits and drawbacks of each. Just like with anything, there are positives and negatives to both, so in order to make a well-thought out, balanced decision, you need to take both sides of the argument into consideration.

Fixed rate

First of all, let’s look at the benefits of a fixed home loan.

  • Predictability1: Fixed loans allow you to lock in your loan at a certain rate for a set period (each financial institution varies). This means you know how much money you will be paying towards your home loan each week, fortnight or month (depending on how you choose to make your payments). Plus, if the interest rates rise, you don’t have to worry – your mortgage repayments will stay the same until your fixed period ends.
  • Peace of mind1: For those who dislike risks, fixed home loans avoid this factor altogether. You know how much money you need to dedicate towards your repayments and can ensure this amount is set aside. It can be especially comforting if you have dedicated a significant portion of your savings towards a deposit for your home, and as a result, may be living on a tight budget.
  • Precise budgeting1: Given that you know how much your loan repayments will be, you can factor this into your budget and ensure you have enough funds to afford your mortgage on top of other bills and expenses. This can also allow you to forward plan and budget if you know you have some costly expenses coming up.

Let’s now go over some of the drawbacks of choosing a fixed home loan.

  • Won’t benefit from rate decreases1: In the instance where the interest rate decreases and is lower than your current rate, you will not be able to benefit from this. Your mortgage repayments will stay on the same interest rate as when you first entered into your fixed term period.
  • Less flexibility1: While a fixed loan may include additional features, such as the capacity to make extra repayments, there is often less flexibility compared to what you would experience with a variable loan. In some cases, you may have the benefit of extra repayments or mortgage offset accounts, but conditions can apply depending on the loan type (restrictions could apply for fixed loans). One of these common conditions is capping the amount of money you can contribute towards extra repayments per year.

Variable rate

Now, let’s take a look at a variable home loan to highlight some of its benefits.

  • Benefit from rate decreases2: As a variable home loan means your rate isn’t locked in, you benefit every time the interest rate decreases. This could then mean the interest component of your repayments reduces significantly, especially if the interest rate stays low for a while.
  • More flexibility2: Variable home loans often come with more additional features than fixed home loans. For example, there generally aren’t any limitations on the number of extra repayments you can make and offset accounts are nearly always included as an added option. In some cases, you may even be able to apply for a variable loan package that offers access to everyday transaction accounts or credit cards. Pay close attention to the list of features when you’re checking it out.

To give you more of a balanced viewpoint on variable home loans, let’s look into some of the drawbacks.

  • Higher repayments with rate increases2: While you may benefit when the interest rate decreases, this also means you lose out when the rate increases. Variable rates are definitely a gamble, so you have to be prepared to take the good with the bad and be prepared for your mortgage repayments to fluctuate regularly.
  • Harder to budget2: If you’re someone who loves to budget, a variable loan may not be for you. You can’t predict whether the interest rate will go up or down, so that means you also can’t guess how expensive your repayments will be. This will mean you’ll need to pay closer attention to your budget to stay on top of your expenses and ensure you don’t default on any of your repayments. It’s not impossible, it just requires you to dedicate a bit more time and attention.

While looking at the pros and cons of both a fixed and a variable home loan may not make it any easier to decide, it gives you a snapshot of what to expect. It’s also a good idea to factor in your personal and financial situations when you’re choosing which option is best for you.

At Queensland Country Bank, you have two great home loan options to choose from with our current fixed or variable special offers.

 

Special offers are available for a limited time only under the Ultimate Home Loan Package. Review the Home Loans Product Information Brochure and the relevant TMD’s available at queenslandcountry.bank. Normal lending criteria, terms, conditions and fees apply and are available on request.

General Advice Warning: This information is intended to be general in nature and is not personal financial advice. It does not take into account your objectives, financial situation or needs. Before acting on any information in this article, you should consider the appropriateness of the information provided. In particular, you should seek independent financial advice.

Sources

1Mortgage Choice, 2023, Fixed vs variable home loan, https://www.mortgagechoice.com.au/home-loans/loan-types/fixed-vs-variable-home-loan/

2Matt Lee, 2022, Fixed and variable rate loans: Which is better?, Investopedia, https://www.investopedia.com/ask/answers/07/fixed-variable.asp