The stand-out advantage offered by a fixed home loan is that you know upfront what rate you’re getting. Plus, the fact that lenders cannot alter this rate during the set loan period giving you absolute peace of mind because you know exactly how much your monthly repayments are and that they cannot be changed. Another benefit to fixed home loans is they often offer lower interest rates than variable home loans of comparable value.

As with most things, fixed home loans have their downsides too. One of their major disadvantages is that if interest rates fall, you’ll still be subject to the rate at which your loan was originally fixed. It’s the risk you take when deciding to go this route. If you’re unlucky, you may well find yourself with a loan that’s locked into an uncompetitive rate. However, if interest rates are low at the time of you taking your loan, it’s likely that the capacity for lenders and the Reserve Bank to cut rates further could be limited.

In this case, if you decide to opt out of your fixed-rate terms, you’ll likely incur “break” fees, which are typically calculated based on the lender’s wholesale lending rate and could add up to thousands.

Yet another negative of fixed home loans is that they are less versatile than their variable counterparts. By this, we mean that fixed loans often don’t include features like an offset account or pay extra towards your account monthly, so settling your home loan faster. One way to get around this con is by splitting your loan into part variable, part fixed terms.

Variable home loans are traditionally the more popular choice due to the flexibility they provide homeowners. The sheer number of variable home loans available is another of their benefits as there is something for everyone. We’re talking about features like an offset account, card access, and the possibility of a redraw.

Variable home loans also often have lower interest rates and lower fees than fixed home loans of comparable value. For example, you could opt for a variable home loan with a one-year introductory rate of 1.99% p.a., and a comparison rate of 2.48% p.a., as well as no application fees or ongoing fees, and with unlimited free redraws. When the one-year introductory period ends, the rate reverts to 2.48% p.a.

Variable home loans are  subject to rate changes as dictated by fluctuating market forces. That means you could pay X dollars monthly one year and Y dollars monthly the following year. Bear in mind, though, that the Reserve Bank only cut the lending rate twice in 2020; that’s one less reduction than in 2019. Prior to that, the lending rate remained unchanged for two years running.

As you might have gathered, variable home loan rates are largely contingent on the lending rate set by the Reserve Bank and also how lenders react to it. However, with the lending rate at a historic low, the room for the Reserve Bank to cut it further is getting tighter. And the good news is that it appears the current low-interest environment could endure for quite some time.