Fixed v Variable

Fixed vs variable home loans

So should you choose a fixed or variable home loan? No matter what the interest rates are doing, a fixed rate home loan will not be for everyone. It’s important to think about fixed vs variable rate home loans and the pros and cons of fixing your home loan.

Advantage of a fixed rate home loan.

The main advantage of a fixed rate loan is that it gives you cash-flow certainty. That is, you know exactly how much your loan repayment will be over the fixed term period. When you are a new home owner or are perhaps setting up a business, or have some other significant demand on your cash, this certainty can give you great peace of mind.

Disadvantage of a fixed rate home loan

The main disadvantages of fixed rate home loans are that fixed term loans tend to be inflexible – and can be expensive if you break the contract! You also miss out on the benefits of any interest rate decreases over the timeframe of your fixed term. Remember that as always, conditions and potentially fees will apply to fixing your home loan, and you should look at the comparison rate of products on your shortlist as well as their current advertised rates.

Fixed rate home loans provide stability of knowing that the repayment will be the same every month. A fixed rate term does lock applicants into one interest rate for a period of time, however; so if interest rates drop, it might end up costing comparatively more in interest. For this reason, it’s important to think carefully when choosing whether to fix a home loan and how long to fix for.

Should I fix my home loan and when is a good time?

There’s no one correct answer to that, unfortunately. But from a repayment point of view, history shows that borrowers have about a 50/50 chance of making the right decision. We explain this in more detail below.

What about right now, though? Currently the average 1-year, 2-year, and 3-year fixed home loan rates available are all lower than the average standard variable rates on offer. Keep in mind, of course, that to secure the “lowest” rates you’ll need good equity and good negotiation skills. Good luck!

What fixed home loan rates are on offer?

Currently across Canstar’s database, we can see interest rates for residential home loans as low as…

Type of interest rate Minimum available interest rate p.a.
Standard variable rate 3.39% p.a.
1-year fixed rate 3.69% p.a.
2-year fixed rate 3.59% p.a.
3-year fixed rate 3.59% p.a.
4-year fixed rate 3.75% p.a.
5-year fixed rate 4.04% p.a.

What’s your chance of getting it right when fixing? There is always a great deal of debate in the media around fixed versus variable home loans. This year our Canstar analysts have taken it one step further. We have determined how often, over the past twenty years, home buyers theoretically saved money over a set period of time by fixing a home loan.

Based on our assumptions and calculations, the end result was almost a 50/50 chance. These calculations are based on the monthly average standard variable rate and the average fixed rate for a 1-year term, a 3-year term, and a 5-year term, according to the loans listed at the time on Canstar’s database, with a starting loan amount of $300,000.

Fixing a home loan for 1 year

Over the past twenty years and based on our assumptions, it was often financially advantageous to fix for 1 year. In fact, the only years where borrowers lost out were in 1998, 2000-2001, and 2008.

Fixing a home loan for 3 years

Based on our assumptions, it was advantageous to fix for 3 years roughly half the time. This was especially true in 1993, 1997-1999, and 2003-2006.

Fixing a home loan for 5 years

I hate to say it, but fixing for 5 years at the average interest rate would seem to be quite challenging to get right. Based on our assumptions, it more often than not saw our hypothetical home buyer in the red over the 5-year period.

It is important to remember however, that past interest rates are not an indication of future interest rates.