Which is best: fixed or variable interest rate?

What is a variable interest rate on a home loan?

A variable interest rate (sometimes also called an “adjustable” or a “floating” rate) is an interest rate on a loan that fluctuates (up or down) over time because it is based on an underlying cost of funds to the lender that changes periodically.

What is a fixed interest rate on a home loan?

A fixed interest rate loan is a loan where the interest rate doesn’t fluctuate during the fixed rate period of the loan. This allows the borrower to accurately predict their future payments. Fixed rates may be available for a term of 1 to 5 years.

What happens after the fixed rate term?

After a fixed rate term the loan usually converts to a variable rate, unless the borrower elects to fix their rate for a further term.

Is variable or fixed rate better?

Generally speaking, if interest rates are relatively low, but are about to increase, then it will be better to lock in your loan at that fixed rate. On the other hand, if interest rates are on the decline, then it would be better to have a variable rate loan.

Often there is greater flexibility on a variable rate loan with access to offset or redraw features however fixed rate loans will provide certainty with respect to the repayment for the term of the fixed rate loan.

What are the risks of taking a variable rate loan?

Adjustable rate loans are generally considered riskier than fixed rate loans because they are unpredictable. You might start out with a low rate on an adjustable rate loan, but a rise in interest rates over time could greatly increase the cost of your loan.

Can you switch from a variable to fixed rate loan?

Borrowers can usually switch from a variable interest rate to a fixed rate with their existing lender, which avoids any penalties. Costs may apply.

Can I get out of fixed rate mortgage early?

Yes, it may be possible to leave your fixed rate mortgage early but (and it’s a big but) most lenders will apply an early repayment charge. If you’re still in the Early Repayment Charge period on your mortgage, a lender might charge fees even if you only want to change the amount you are borrowing.