What’s the difference between variable and fixed interest rates?

Interest rates are a hot topic at the moment, and you may be hearing people talking about “fixing” their loan at a certain rate. So what does this mean?

Interest rates are subject to change, and are likely to fluctuate (both up and down) over the lifetime of your home loan.

If your loan is on a variable rate, your repayments would be impacted by rate changes, and a fixed rate would not. But there is more to consider when deciding what’s best for you.

Variable Rate Home Loans

What are the benefits?

1. You can usually make extra repayments, which reduces the interest you’ll need to pay, and the term of your loan.
2. If interest rates drop, you’ll benefit immediately from reduced repayments.

What should I look out for?

As it’s a fluctuating rate, you’ll need to have funds available if interest rates rise and increase your repayments.

Fixed Rate Home Loans

What are the benefits?

1. It’s predictable - you’ll know exactly how much your payments will be, which can make planning easier.
2. If interest rates go up, you won’t be affected and will keep paying the fixed rate for the duration of your fixed rate term (usually this is between 1 and 5 years).

What should I look out for?

1. If interest rates go down, you won’t benefit from the new lower rate either, as you’ll be locked into your fixed rate for the term. There are ways to end your fixed rate, but it may involve something called “break costs” which can be expensive.
2. Extra repayments are limited, so if you had a lump sum amount to put towards your home loan you may not be able to, depending on your loan.

Anything else I should know?

A Hybrid option: Split Loans

At Snow Star Credit Union, you’re able to fix a portion of your home loan, and keep some of it on a variable rate. This might mean the best of both worlds: you can safeguard against future rises while having the ability to make extra payments.

To see the impact that extra repayments could make to your loan, check out our Extra Repayments Calculator. 

Comparison Rates

When researching which loan is best for you, it’s important to look at comparison rates of each, which will give you a better indication of the overall cost of the loan as it includes the fees and charges involved.