Variable or Fixed Home Loans

The standard variable rate is the rate the banks normally apply their discounts to. The RBA adjusts their interest rate up or down in an attempt to regulate the economy, thus affecting the standard variable rate on your loan. The rate on your loan can go up, down or both over the term of your loan.

Most lenders also offer fixed interest rate loans, in which your interest rate stays the same for a fixed period of time, which is usually no less than 12 months to no more than five years. There are some lenders that will look at a 10 year fixed rate but they are very rarely taken out by borrowers.

We like fixed rates for at least the first few years of your loan to stabilise your costs. A good strategy is to compute the payments at the current variable rate and then add 2%. If paying repayments at the higher rate cause a problem, try to lock in a fixed rate to ensure that sudden rises in the interest rate don’t put you in a bind later.

Fixed rate loans do carry two caveats. Firstly, some lenders don’t allow you to make extra repayments or limit how much extra you can pay during the fixed rate period. Secondly, most fixed rate loans include a penalty if you pay them out early or make extra payments.

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