Fixed vs. variable home loans | Decide what suits you - NAB

Choosing between a fixed or variable rate home loan

A fixed rate locks in your repayments for a set period, giving you certainty and protection from rising interest rates. A variable rate moves with the market, offering more flexibility and the potential to pay your loan off faster. By weighing your options carefully, you can find the loan that best suits your needs and budget.

Pros and cons of a fixed rate home loan

Let’s break down the advantages and limitations of a fixed rate home loan, so you can better understand if this option meets your goals.

Advantages

  • Your interest rate stays the same throughout the fixed term. Your monthly repayments remain constant, helping you budget and plan your finances with confidence (until the end of the fixed rate period).
  • If interest rates rise during your fixed term, you’ll be protected from any increases in your loan repayments. This can provide you peace of mind, especially in a fluctuating economic climate.
  • These loans are generally straightforward, which can help simplify the home buying process. Customers can also benefit from securing their fixed interest rate during their home lending application with a Rate Lock. This provides certainty of knowing what the fixed interest will be at loan drawdown.

Limitations

  • You won’t benefit from any variable interest rate reductions if they occur within the fixed term.
  • You won’t be able to create offset accounts to help reduce your interest rate.
  • Break costs or economic costs may be charged on a fixed rate loan. This usually happens when you make additional repayments (over a certain amount) on the loan, switch to a different product, repay the loan in part or in full before the end of the fixed rate term and when the total amount owing is due because the loan is in default.
  • Redraw is not available on a fixed rate home loan. Usually, you’ll need to wait until the end of your fixed term to redraw.

If you’ve made the decision to fix the interest on an existing variable home loan, it’s a simple update to make. Read our step-by-step instructions on fixing the interest on your home loan.

Also learn what you can do if your fixed interest rate period expires.

Pros and cons of a variable rate home loan

With interest rates that fluctuate with the market, variable rate home loans offer a mix of advantages and limitations.

Advantages

  • Variable rate loans may start with lower interest rates compared to fixed rate loans, which could translate to lower monthly repayments.
  • These loans generally offer more flexibility with 100% offset available.
  • You can make extra repayments and pay off your loan early. This means you could save a fair bit on interest over the life of the loan.
  • If the market interest rate drops, you’ll benefit from paying less in loan repayments, and could use the money to increase your savings or invest.

Limitations

  • The biggest risk with a variable rate loan is that your interest rate and the subsequent monthly repayments could increase if the market rates go up. Changes to the cash rate, which is set by the Reserve Bank of Australia (RBA), are one factor that can influence interest rates across the market.
  • Uncertainty around repayments could make it difficult for some to plan and predict cash flow, over the long term.

If your variable loan rate increases, you can use your loan features such as linking up to 10 offset accounts or redraw to help ease cash flow concerns. Alternatively, creating money buckets in advance and staying disciplined with your savings can offer relief when market fluctuations occur.

Example: Comparing fixed and variable rate home loans

Imagine a borrower takes out a $400,000 home loan over 30 years and is deciding whether to fix their rate for the first three years or stay on a variable rate.

  • The fixed rate on offer is 6.6% p.a. for three years.
  • The variable rate starts at 5.9% p.a. but may change over time.

Scenario 1: Variable rate stays the same

If the variable rate remains at 5.9% for the full three years, the borrower will pay less interest overall by staying variable compared to fixing at 6.6%. While fixed repayments offer certainty, the borrower would pay a higher rate than necessary during this period.

Scenario 2: Variable rate rises gradually

If the variable rate increases over three years from 5.9% to 6.6%, the difference in total interest paid between the fixed and variable options becomes much smaller. In this case, fixing may cost slightly more but provides the benefit of predictable repayments during the fixed term.

Scenario 3: Variable rate rises more sharply

If the variable rate rises beyond 6.6% during the three year period, the fixed rate option could result in lower total interest paid over that time. The borrower would also avoid higher repayments as rates increase, making budgeting easier.

Split loans

If you’re finding it hard to choose between fixed and variable, a split home loan can give you a bit of both. You choose how much of your loan is set to a fixed rate (for more predictable repayments) and how much stays variable (so you can keep some flexibility if rates change). This can be a useful option if you want some certainty for budgeting, but don’t want to lock in your entire loan.

Key summary: Fixed vs variable home loan

  • Fixed rates stay the same for a set term, so repayments are more predictable.
  • Variable rates can change but typically offer more flexibility and features like a 100% offset.
  • With a fixed rate, you won’t benefit if rates drop during the fixed term.
  • Fixed loans can be less flexible, with limits like no offset and potential break costs in some situations.
  • A split loan combines fixed and variable, so you can balance certainty with flexibility.

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Important information

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.