When you apply for a home loan, one of the most important decisions you’ll need to make is whether you should choose a variable or fixed interest rate loan. We’ll help you to understand the advantages and disadvantages of a variable rate before you start comparing the variable rate home loans we have on offer.
By Yvonne Taylor | Updated 18th March 2020
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The interest on a home loan can be charged at either a fixed rate or a variable rate.
If the rate is fixed, it will never change during the term of the loan.
If the rate is variable, it can go up or down at any time, when the lender changes its standard variable rate. A lender may change its standard variable rate in response to a change in the Reserve Bank of Australia’s official cash rate, because this rate affects the lender’s own borrowing costs.
But the lender is not obliged to pass on to its borrowers any or all of the change in the Reserve Bank’s cash rate, even though the federal government may urge them to do so if the rate goes down. The lender may also decide to change its standard variable rate for other reasons, usually justified by competitive forces or profitability changes.
It depends on how lenders view the future of the interest rate market. They employ economists who examine current and likely future economic indicators and market forces, and try to predict whether interest rates both in Australia and globally will go up or down within a given period, and by how much. They use this data to calculate the fixed interest rates they offer, after building in a profitability margin.
So if the lender believes that its own borrowing rates will rise in the future, the fixed interest rate it offers to customers will be higher than its current standard variable rate. But if the lender believes that interest rates are likely to decline, it will probably offer a fixed interest rate that is lower than the current standard variable rate.
Most home loan borrowers will not have a better understanding of the interest rate market than professional economists, so the best way to choose between a fixed and a variable interest rate is not by comparing the two kinds of rates on offer and choosing the lowest. It’s more important to look at the advantages and disadvantages of each kind of interest rate.
The advantages and disadvantages of a fixed interest rate loan are explained on our ‘Fixed rate home loans’ page.What are the advantages of a variable rate home loan?
Compare loans and find one with the features you need and that you will actually use. For example, there’s little point in looking for a loan with a redraw facility and offset account if your budget is so tight that you rarely have any spare funds for making extra repayments or for parking in an offset account. But just because your budget is strained when you first take on the loan, you may find things easier later on, so remember to plan for the future.
Deciding which loan features you need or don’t need will often determine whether you go for a flexible, feature-rich variable rate loan or an inflexible but comfortingly predictable fixed rate loan with fewer features.
At Finty we want to help you make informed financial decisions. We do this by providing a free comparison service as well as product reviews from our editorial staff.
Some of the products and services listed on our website are from partners who compensate us. This may influence which products we compare and the pages they are listed on. Partners have no influence over our editorial staff.
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