Buying a home is an exciting milestone whether it’s your first home or for an investment. Understanding all the home loan terms and conditions can be confusing - like the difference between a fixed and variable rate home loan. To help you work out which option is most suitable for your needs, we’ll run through the pros and cons of both fixed rate and variable rate home loans.

Pros and cons of a fixed rate home loan

If you go with a fixed rate home loan, you can lock in an interest rate for a set period of time. With NAB, you can choose to fix your loan between one to five years. The benefits of locking in your rate for a fixed term include:

  • the piece of mind knowing that your interest rate will not change
  • ability to budget better as there won’t be any surprises when it comes to your repayment amount, you’ll be able to better plan and budget for the money you’ll need (at least until the end of the fixed rate period).

While there are great benefits from fixing your home loan, you should consider some of the limitations before taking out a fixed term loan:

  • You can’t benefit from any variable interest rate reductions if they occur within the fixed term.
  • You won’t be able to create an offset account to help reduce your interest rate.
  • A rate lock fee is payable if you wish to protect yourself from changing interest rates prior to your fixed rate loan settling (0.15% of the loan amount payable upfront).
  • Break costs may be charged on a fixed rate loan when you make additional repayments (above $20,000) 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. However, if you are at least one full repayment ahead, you can redraw a minimum of $500 once the fixed period expires.

If you’ve made your decision and you’d like to fix your interest on your home loan, it’s a simple update to make. See our step-by-step instructions on fixing the interest on your home loan via the NAB app.

Pros and cons of a variable rate home loan

If you sign up for a variable rate home loan, your repayments will vary as NAB adjusts its interest rates from time to time. Although a variable rate home loan offers less interest rate certainty, it does provide great benefits including more flexibility.

  • 100% offset is available to lower the interest payable on your loan.
  • Ability to make additional repayments to help you save on interest and pay down your loan faster.
  • If you’re at least one full repayment ahead, you can access redraw (minimum $500) at any time with no fees.
  • If NAB lowers variable interest rates, you will benefit from making lower interest payments.

Choosing between a fixed or variable rate home loan

When choosing whether a fixed rate and variable rate home loan is most suitable for your needs, consider the pros and cons of each before making your decision. No one can accurately predict how interest rates will change. You’re best to consider your lifestyle, financial situation and what features you need from a home loan.  

If you think both types of loans would suit you, there’s a third option. You can split your mortgage in a ratio you’re comfortable with so you can have a combination of a fixed and variable rate home loan. You can choose 50/50 split or even 80/20; it’s really up to you what combination you go with when you tailor a home loan. That way you can still have consistency and flexibility when managing your repayments.  

While there’s no right or wrong answer to which type of home loan to go with, it’s always best to know what your options are and what works best for your needs. Whether it’s a fixed rate, variable rate or split home loan, you can get started online with a home loan enquiry form.

Ready to purchase your home? Talk to our home loan experts today.

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.