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Fixed Loans vs Variable Loans: Get to Know the Difference!

Jacaranda Team

Written by - Jacaranda Team

May 24, 2017 4 minute read
Fixed Loans vs Variable Loans: Get to Know the Difference!

Unfortunately, there is no way to predict what will happen to the economy and interest rates in the future. However, you can decide which loan type is better for your situation by knowing the differences between fixed loan rates and variable loan rates.

You can get fixed and variable loan rates on a range of loan types, including personal loans. Although, you commonly see home loan lenders offering both rates as options for their loan products. In this article, we’re diving into the basics of fixed loans vs variable loans.

So whether you’re looking to get a personal loan or a home loan, keep reading to find out more!

What are fixed loans?

A fixed loan interest rate is a loan where the interest rate doesn’t fluctuate during the fixed period of the loan. Consequently, borrowers can predict their future repayments and budget for them.

What are variable loans?

A variable loan rate is a loan in which the interest rate is charged on the outstanding balance and the interest rate at the time. Basically, this means your repayments will change based on fluctuations in the market interest rates.

Why do interest rates change?

Variable loan interest rates change with the fluctuation in the Reserve Bank’s cash rate. Variable loans can change due to inflation and the RBA (Reserve Bank Australia) uses the cash rate to control the economy.

While they will generally increase the cash rate when the economy is doing well, when the economy is weakening the cash rate will often come down.

Where can I find the best fixed-rate home loans?

There are many home loans and packages available through a variety of companies and there really isn’t one best home loan for everyone. After all, we all have different needs and wants.

So, you need to find the best fixed-rate home loan that works for you. To do this you can go to one of the many home loan comparison sites and see what the banks are offering.

Or you can consult a mortgage broker who can organise and search on your behalf to find the best interest rate and home loan.

How do I find the lowest fixed loans interest rate home loan?

There are a few ways you can find the lowest fixed rate home loan. You can search fixed rates and find a site that gives you comparison rates between all the lenders.

Or, you can get advice from a Mortgage Broker who can inform you of the best rate and deal being offered by the lender of your choice.

Although you won’t be charged a fee from the Mortgage Broker (the lenders pay them to refer your business), it is more often than not, rolled into the Home loan. This is not necessarily a bad thing, but something to be aware of.

However, make sure your Mortgage Broker is working for you. Ask questions and have them explain anything you don’t understand in detail to get the best deal you can!

What are the benefits of having 5 year fixed home loan rates?

There are many benefits from having a 5 year fixed loans home loan. One of the major benefits being that when interest rates are fluctuating your home loan repayments will remain the same.

This is a major advantage because you won’t be forced to pay higher mortgage repayments because the interest rate has increased.

Check out the table below for a full Pro/Con list for both interest rates.

Fixed-rate home loans: Pros & cons

PROCON
Easier budgeting, able to plan aheadRate drops won’t apply to you
Rate rises won’t affect youThere are limits on extra repayments
A redraw facility may not be offered on fixed-rate home loans.
You may be charged a break fee if you change or pay off your home loan within the fixed loans rate period

Variable-rate home loans: Pros & cons

PROCON
You can make extra repaymentsMakes budgeting harder
More features eg unlimited redraws or saving on interest with offset accounts. Easier to switch loans.Mortgage stress, if you aren’t prepared for a rate rise you may have trouble keeping up with repayments.

Finding the right rate for you

Ultimately, if you’re tossing up between fixed loans or variable loans it all comes down to individual circumstances. You should weigh up the pros and cons of your situation and decide what may suit best.

With a home loan if you are intending on staying in your home for an extended period of time and can’t see why that would change and fixed loans interest rates are at a good rate then it would make sense to fix your loan.

However, if you are not sure what your future holds and you may want to sell or change your loan in the foreseeable future then maybe a variable rate is for you!

More interesting reads

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Jacaranda Team

Written by Jacaranda Team

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Last updated: 19/08/2020, 10:00am

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