Fixed versus variable rate loans

Deciding on what type of home loan to get is a significant, and sometimes daunting, financial decision for many first home buyers. The choice may influence your financial freedom and capacity to build wealth long-term, so it’s important to understand the advantages and disadvantages of what’s available to help make an informed decision.

A variable rate loan is a type of home loan where the interest rate you pay can go up or down. The interest rate is determined by market conditions and the cash rate set by the Reserve Bank of Australia (RBA).

Variable rate loans often come with the option to:

• make extra repayments to your home loan
• add an offset account or redraw facility that may help you pay off your loan faster or reduce the length of your loan.

Because variable rate home loans can rise and fall at any time throughout the term of your loan, this can result in:

• occasional uncertainty on what repayments may look like
• difficulty with budgeting due to the unpredictability of the market.

A fixed rate loan stays the same for a set period, usually up to 5 years (depending on the lender). When the period ends, you move to a variable rate, or alternatively, take up a new fixed rate loan.

Fixed rate loans may be associated with benefits including:

• protection from interest rate rises during your fixed rate term
• an easier ability to budget due to repayments that won’t fluctuate.

Committing to a fixed rate loan may mean:

• you miss out on the benefit of interest rates dropping
• inability to make additional repayments, or capped repayments.

As seen in recent times with COVID-19 and wars in Ukraine and the Middle East, world events can influence the market quickly and drastically, resulting in cash rates moving up and down unpredictably. So unfortunately, sometimes the ‘better’ option can be more about luck and timing than anything else. 

So, in lieu of finding a crystal ball that can accurately predict market conditions and RBA cash rates, choosing the ‘best’ rate will often depend on:

• your income and expenses
• your assessment of how the market might change
• what the flow-on effects may be, and;
• if you can weather those changes to continue making repayments while maintaining your desired lifestyle on your current budget.

Terms, conditions, fees, charges and lending criteria apply. Information provided is subject to change. Full details available on application. Bendigo and Adelaide Bank Limited (ABN 11 068 049 178, AFSL and Australian Credit Licence 237879) (“Bendigo Bank”) is the credit provider. Credit services are provided by Tiimely Pty Ltd (ABN 41 605 696 544 and Australian Credit Licence 496431) (“Tiimely”). Insurance Australia Limited trading as NRMA Insurance (ABN 11 000 016 722) (“IAL”) is a member of AFCA and does not hold an Australian Credit Licence. IAL may receive a commission from Bendigo and pay a commission to Tiimely if your loan application is approved.