Is a fixed or variable home loan best for rising rates?
Rising interest rates are something Australians haven’t experienced since 2010, so it’s understandable that many homeowners are looking for ways to manage potential rising costs.
But higher interest rates don’t need to cause rising heart rates. You have options (and support from us). The best place to start is by considering your short- and medium-term financial needs, and doing a bit of old-fashioned research.
So let’s find out more and compare whether a fixed, variable or split home loan is the best choice for you.
Why are rates rising?
The Reserve Bank of Australia (RBA) increases the nation’s cash rate to mitigate inflation, control employment and promote economic growth. When this happens, it increases the funding for banks to run, so they need to decide if they can take on the extra costs, or if they need to pass them down to customers. To dive into this topic a little deeper, visit our Rate Rise hub, where we provide recent updates and finance tips to manage rising costs.
The downside of the cash rate increase is that it can often cause home loan interest rates to rise if banks decide to pass them on – and ignites the age-old fixed vs variable interest rates debate.
What is a fixed rate home loan?
With a fixed rate home loan, you agree to a set interest rate over the term of your home loan. That means the repayment amount you start with will be the same at the end of the fixed rate period.
Should I fix my home loan?
Locking in a fixed rate home loan can provide certainty (for the fixed term at least), which is also great for tapping out of rate anxiety for a while.
Advantages
Because your rate doesn’t change with the market, your monthly repayments will stay the same. That makes budgeting a lot easier – especially when planning things like weddings, holidays, etc. – but it means you need to be ok with potentially paying more than others if the rates go down again. Using a mortgage repayment calculator can help you get a better picture of your future finances. You can also make extra repayments on a fixed rate home loan up to $10,000.
Things to consider
A great fixed rate can be appealing, but make sure you check out the variable rate you’ll pay once the fixed term expires. This ‘revert’ rate may be a lot higher than the fixed rate, so you’ll need to make sure you have enough money to cover the potentially higher repayments once the fixed rate period ends. Also, while you can make extra repayments, it is often capped at around an additional $10,000 per year. Anything more will attract a penalty fee.
What is a variable rate home loan?
As the name suggests, variable rates move with the market. Throughout the term of your loan, your interest rate could rise or fall.
Advantages
The obvious advantage of variable rates is that if they do go any lower, then so will your repayments.
You’ll also likely have the flexibility to make extra repayments. And you can use a redraw facility to withdraw additional repayments when you need them, so it’s a lot more flexible with your lifestyle too.
You can also reduce the interest you pay with an offset account, a transaction account linked to your home loan.
Things to consider
Because rates have risen for the first time in over a decade, it’s causing some nervousness, but it doesn’t necessarily guarantee that fixed rates are the better option. At the end of the day, it comes down to how you tolerate risk. If rates rise through the roof, your roof (and everything under it) could get a lot more expensive.
Fixed vs variable home loans
The difference between fixed and variable home loans is that one is more certain than the other. If you enjoy going with the flow, the ‘floating’ rate of a variable loan may look appealing. Beyond the risk and the rate, deciding which is right for you will come down to you and your lifestyle. What’s your cash flow situation – can you put away extra funds, or will you need to dip in for future expenses? Do you have job security? And can you afford higher repayments if need be? You can compare our fixed rate and variable rate home loans to see what works for you.
Like the idea of locking in a great rate but unsure about the commitment factor? Enter split loans.
What is a split loan?
A split home loan enables you to divide your home loan between a fixed and a variable rate.
It’s like taking an each way bet – giving you the flexibility of a variable rate with the certainty of a fixed rate. You also get access to all the variable rate features like offset or redraw facility, and the ability to repay more on the variable portion of your loan each year with no caps.
Things to consider
Getting the best of both worlds also means dealing with the disadvantages of both types of loans. The variable portion of your loan can still be affected by rate rises. This could increase your repayment amount.
On the other side, if rates go down, you won’t pay any less on your fixed component. You may also have to pay a break fee is you decide to refinance or pay off your home loan early.
How do I know what’s the best home loan for me?
There may only be a few options, but there’s a lot to factor in when choosing between them. And likely the biggest decision will be your appetite for risk with a variable rate, vs certainty with a fixed rate.
Still haven’t decided what’s best for you? You can compare our home loan options at any time to work out the best option for you.
Visit our rate rise hub for more
It's a strange time, but we're here to help. Our rate rise hub has all the information you need to navigate rising rates.
