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Fixed vs Variable Home Loans - How to Choose

fixed vs variable imageIf you’re looking to buy a home, then making sure you choose the right home loan for your needs will be an important decision. There are two main types of home loans - fixed and variable. It’s also possible to get a split home loan, where part of the loan is fixed and part of it is variable.

When discussing a fixed rate vs variable rate, we are talking about whether the interest rate on the amount of money you have to repay to the bank is either fixed at one rate, or variable over time. Both fixed and variable home loans come with certain advantages and conditions, and the type of home loan that’s right for you will depend on your own circumstances. So have a read below of what kind of home loans are available and which ones are better for different situations.

Fixed Home Loan vs Variable: What's the Difference?

The difference between a fixed home loan and a variable home loan is whether the interest rate attached to the loan remains fixed from the beginning of the loan, or is variable throughout it.

In a fixed home loan, you agree with the bank at the time you take out the loan what the interest rate will be for a certain period of time. The interest rate gets locked in at the date you draw the loan and is guaranteed to stay at the same rate, no matter what happens to the market.

In a variable home loan, your interest rate will start out at an agreed amount, but can be changed by the bank. The interest rate will be changed according to variations in market interest rates. If interest rates go up, you’ll be required to make a larger minimum repayment and, if they go down, you’ll be required to make a lesser minimum repayment.

Fixed Home Loan

With a fixed home loan, you and the bank will agree on a specific rate that will apply to the loan for an agreed-upon duration. Greater Bank offers fixed loan rates for periods between 1 and 5 years. Have a look at the specific details for Greater Bank’s loan products to see which one is right for you. They include the Ultimate Home Loan, the Great Rate Home Loan, the Investment Ultimate Home Loan, and the Investment Great Rate Home Loan.

The major benefit of a fixed home loan is that you have the security that your interest rate won’t change, even if the market does. It makes it easier to budget for the future because you can be absolutely certain about the amount you need to pay back.

The specific interest rate of a fixed home loan will depend on how long the fixed period is that you and the bank agree to. If the period is longer - for example, 5 years - The interest rate may be slightly higher to allow for potential market changes. On the other hand, if you entered a fixed interest loan for 1 year, for example, your interest rate might be lower, as any changes might have higher degree of confidence than a longer-term rate. So the interest rate is balanced relative to the duration of the guarantee that the rate will stay the same.

What are the advantages of a fixed rate home loan?

  • Easy to budget for the future
  • Choose from the start the repayment schedule that works for you

What are the disadvantages of a fixed rate home loan?

  • May be extra costs involved in repaying early

Variable Home Loan

A variable home with market interest rates. One of the benefits of a variable home loan is that you can make your repayments faster if you want. So, if you have cash on hand, you can repay it to reduce the remaining amount you pay interest on, without incurring fees.

All of Greater Bank’s home loan products - Ultimate, Great Rate, Investment Ultimate, and Investment Great Rate - have variable rate options.

Variable Loan Summary

  • Flexibility of repayments
  • Variable with the market
  • Benefit from interest rate decreases
  • Required to increase minimum repayments if interest rate rises

Split Home Loan

It’s also possible to split your home loan between a fixed and variable rate. This means you would take out a certain amount of money at a fixed rate, and another amount at a variable rate. The advantage of this is that you give yourself some security in your fixed-rate payments, but you can also benefit from the flexibility of a variable loan.

Greater Bank

Home Loan Tips and Hints

Choosing the right home loan for you really depends on your own personal situation and needs. Whether you go for a fixed loan, a variable loan, or a loan split between the two, you really need to consider your own personal circumstances. Each of the three options comes with its own advantages and drawbacks, but some will match up with different people better.

If, for example, you have strict budgeting goals and you really want the security of a fixed rate, it may very well be the best option for you. A fixed-rate might also just suit you better if you like to keep things simple and secure.

On the other side, a variable home loan allows you to benefit from market fluctuations. So, for example, you can benefit from interest rate decreases. But you have to be willing to ride the market if that’s the case. You’ll need to make sure your income, or your projected income, will be able to cover increases in the rate.

If you’re not absolutely sure about either option, you can split your home loan between the two, hedging your bets a little. You’ll get the security of knowing part of your loan is locked in at a certain amount, while you can still benefit from a potentially low variable rate.

Your Fixed vs Variable questions answered

Variable interest rates

A variable interest rate is a rate that fluctuates according to market conditions. Sometimes known as a floating interest rate.

So, this means that the variable interest rate that you are paying today may be different in 6 or 12 months time.

Fixed interest rates

A fixed interest rate is a rate that is not subject to market condition fluctuations, but only for a set period of time. When you choose a fixed rate, your rate will not change for the fixed period. 

A fixed interest rate can give some assurance when it comes to knowing what your loan repayments will be over the set term, but it also may come with the disadvantage that if variable rates drop, your fixed rate and repayments will stay the same for the set term.

Check out Greater Bank's full range of current fixed and variable home loan interest rates below.

Compare current Home Loan interest rates

No one loan is perfect for everyone.

At Greater Bank, we understand that every one of our valued customers have different needs and are at different stages in their lives.

The right loan for you depends on these needs.

A variable rate loan means that the interest rate on the loan may go up and down over the loan period. This allows you to make additional or early repayments to take advantage of interest rate fluctuations.

A fixed rate loan means that the interest on the loan remains constant over a fixed period, so your repayments will stay the same. You will be able to budget for your repayments and are protected from rises in interest rates.

Still have questions? Contact a friendly Greater Bank staff member on 13 13 86 or visit your nearest branch.

We understand your circumstances may change which might require you to payout your loan completely or change your fixed rate loan by changing the loan type.

However to do so, you need to ‘break’ the terms of your loan contract. A break cost fee is intended to recover any loss that Greater Bank will incur when a customer breaks their fixed rate contract; which can happen as a result of changes in interest rates.

A break cost fee may be payable if the loan is repaid before the end of the fixed rate period, or if you switch to another loan type during the fixed rate period e.g. from a fixed rate to a variable rate.

The break cost fee is an estimate of the interest we should have received for the rest of the fixed rate period compared to the interest we would receive if we relend those funds.

We compare the interest rate you locked into the equivalent current interest rate based on the time remaining on your fixed rate period.

If fixed interest rates have increased since you locked in your fixed rate, it’s quite possible that you won’t be charged a break cost fee.

We only charge a break cost fee if we will incur a loss as a result of you breaking your fixed rate loan.

A simple version of the break cost formula is:

Break Cost = Loan Balance Owing x Interest Differential x Remaining Fixed Period

Simple example break cost calculations

Example 1
  • Loan balance of $300,000 with a fixed rate of 5.00% p.a. for 5 years, which is repaid after 2 years. The time remaining for the fixed rate term locked in is 3 years and the current 3 year fixed rate is 4.00% p.a.
  • Break Cost fee = $300,000 x 1.00% x 3 years
  • Break Cost fee = $9,000 approximately
Example 2
  • Loan balance of $300,000 with a fixed rate of 4.80% p.a. for 5 years, which is repaid after 2 years. The time remaining for the fixed rate term locked in is 3 years. The fixed rate of 4.80% p.a. is the discounted interest rate (fixed rate less a discount of 0.20%). The current 3 year fixed rate is 4.00% p.a. and the equivalent current rate after allowing for a discount of 0.20% is 3.80% p.a.
  • Break Cost fee = $300,000 x 1.00% x 3 years
  • Break Cost fee = $9,000 approximately
Example 3
  • Loan balance of $300,000 with a fixed rate of 4.00% p.a. for 5 years, which is repaid after 2 years. The time remaining for the fixed rate term locked in is 3 years and the current 3 year fixed rate is 5.00% p.a.
  • Break Cost fee = $NIL approximately
  • A break cost fee would not apply as there is no loss, because we can re-lend the loan funds at a higher interest rate.

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