Deciding between a fixed and variable rate

22nd Oct, 2018 | First Home Buyer, Investor, Loan Features, Refinance

In this article:
Paul Dwyer gives you his top advice on deciding between a fixed or variable rate home loan

Paul Dwyer

  • Variable rate home loans tend to be more flexible, with more features (e.g. redraw facility, ability to make extra payments); fixed rate home loans typically do not.
  • Fixed rate home loans have predictable repayment amounts over the fixed term, variable rate home loans do not.
  • If you get out of (“break”) a fixed rate home loan term, you will usually be charged significant extra costs.

Fixed home loan interest rates
Fixed home loan interest rates could be termed predictive. That is, lenders look at the cost of holding money at a certain rate for a certain amount of time and determine the interest rate accordingly.
In general, if a lender expects the cash rate to rise, the fixed rate will usually be higher than the variable rate; on the other hand, if the expectation is for the cash rate to fall, the fixed rate will tend to be lower than the current variable rate.
When a borrower fixes the interest rate on their home loan, they are usually anticipating that the variable rate will rise above the rates which they have locked in.
Lenders may offer fixed terms between 1 and 15 years; however, most fixed rate terms are between one and five years. Once a borrower has locked in their fixed rate, they will start paying the fixed interest rate straight away.
For example, if a borrower fixed their loan today at a five-year fixed rate which is 2% higher than the variable rate, the borrower would start paying an extra 2% interest right away.

Pros and cons of fixed rates

A fixed rate loan is a loan that has a fixed interest rate and therefore fixed loan repayments.
The time period of these loans can vary, but you can usually “lock in” your repayments for between 1-5 years. Although the fixed rate period may be 3 years, the total length of the loan itself may be 25 or 30 years. At the end of the fixed loan period you can decide whether to fix the loan again for another period of time at the current market rates or convert the loan to a variable interest rate for the remaining time left of the loan.


  • Repayments do not rise if the official interest rate rises
  • Provides peace of mind for borrowers concerned about rate rises
  • Allows more precise budgeting


  • Repayments do not fall if rates fall
  • Allows only limited additional payments
  • Penalises early payout of the loan
  • Variable home loan interest rates

Lenders’ variable home loan interest rates fluctuate approximately in parallel with the Reserve Bank of Australia’s “cash rate”.
Variable rates are a reflection of the current economic climate. The Reserve Bank uses the cash rate as a blunt instrument to try to control inflation – when inflation is getting too high (typically when the economy is doing well) the cash rate goes up; when the economy is weakening (inflation usually is lower) the cash rate often comes down.
At Yellow Brick Road Penrith we can help wade through the various options and complete comparisons for you, so give us a call today on 02 4721 1003 or fill in the form and we will call you.

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