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Home loan guide / Home loans explained

Fixed vs. variable loans

3 min read

Caitlyn Smith

To fix or not to fix? We explain the difference between fixed and variable rate loans, and the pros and cons of fixing your rate. So you can decide which type of home loan is best for you.

TL;DR

A fixed rate home loan has an interest rate locked in for a specified time (usually up to five years), regardless of changes to interest rates. Which means your loan repayments will stay the same over the fixed period.

A variable rate loan has an interest rate that can fluctuate at the lenders’ discretion based on changes in the market. This means your repayment amount can change too. Change, vary, variable. You’re getting it now, right?

The difference between fixed and variable

Reliability

With a fixed rate you’ll have the security of knowing your repayments won’t change for the time that your rate is fixed. It makes budgeting easier, because you’ll have certainty about how much of your income you need to put aside for your loan repayments. And even if interest rates rise, fixing your rate will secure it and could save you money over the long term. The downside to this is that if you fix your interest rate and interest rates drop, your interest rate will stay the same.

Variable rates will change based on market influences (like the cash rate set by the Reserve Bank of Australia, among other things) at the lender’s discretion. This means that your repayment amount will also change. This can be good or bad depending on how the market is performing. If your interest rate drops, your repayment amount will be less, but if your interest rate rises, so will your repayments. This is something you should keep in mind when budgeting.

Flexibility

Lenders have more rules around fixed rate loans, including rather large fees for breaking your contract before the fixed period ends. Fixed rates are good for when you know that your situation won’t be changing any time soon, and are happy to stick with the same home loan for a while.

Variable rates are a little more flexible in this respect. If you want to refinance your home loan while on a variable rate, you won’t need to pay a break cost to do so. So if you’re planning to move house soon or not sure what the short-term future holds, it may be best to go with a variable rate instead.

Additional repayments

With a Tic:Toc fixed rate loan, there's a $20,000 limit on extra repayments towards reducing your loan balance. If shortening your loan term is a priority, a variable rate may be more suitable, as you can make unlimited additional repayments, whenever you want. Or, think about an offset account for $10/month, available with all our variable and our fixed home loans.

Remember: more repayments = shorter loan term = less interest = lower cost for you. And that’s an equation we can all get behind.

Why do rates matter so much?

The rate on your home loan dictates how much interest you will pay on your borrowed amount, over the life of the loan. Even a small change in rate can make a big difference over the 30-year loan term.

For example, if you had a rate of 5.0% and interest rates fell in the first year by 0.25%, your monthly repayments would drop by about $100 a month, on a loan of $700,000. And you would save around $38,000 in interest over a 30-year loan term. That’s your Netflix subscription covered for 3,800 months.

The rate on your home loan dictates how much interest you will pay on your borrowed amount, over the life of the loan. Even a small change in rate can make a big difference over the 30-year loan term.

For example, if you had a rate of 5.0% and interest rates fell in the first year by 0.25%, your monthly repayments would drop by about $100 a month, on a loan of $700,000. And you would save around $38,000 in interest over a 30-year loan term. That’s your Netflix subscription covered for 3,800 months.

Applying for a Tic:Toc home loan

We’ll ask you some questions and provide you with loan options we think will suit you best – whether that be fixed or variable. But the decision will be all yours. Have more questions? Let's talk.

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