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Just as it sounds, a fixed rate home loan involves locking in a certain interest rate for a fixed period of time, usually 1 to 5 years.

The advantages of a fixed rate are

  • Provides you with certainty of exactly what your repayments will be for the fixed rate period
  • Your home loan rate is locked in the agreed interest rate even if interest rates increase

The disadvantages to a fixed rate home loan are

  • You are usually limited in paying off extra during the fixed rate period (often $10,000 extra per year) and charges may apply if you exceed this amount
  • Offset accounts, are usually not available
  • Large break/exit fees can apply if you end the loan within the fixed period

A variable rate home loan, is based on an interest rate that can move up or down, which is at the banks discretion and often follows movements of the Reserve Bank of Australia.

Advantages

  • Variable rates are usually quite flexible, allowing you to pay extra at any time and redraw on extra funds you have paid
  • Often an offset account is available
  • Only limited fees apply if you pay the home loan out early and ahead of time (often between $300 to $400)

Disadvantages

  • If interest rates go up, you interest rate will likely go up and as will your repayments
  • There is no certainty as to what your repayments will be in the future

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