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Fixed rates vs Variable rates – pros and cons



Fixed rates are at an all time historic low and it could be a good time to consider three to five year fixed rates.

But have you always wondered what the pros and cons are of choosing fixed rates over variable rates or vice versa? Here are some considerations for you..

Fixed rates – pros

  • You know exactly how much your weekly, fortnightly, monthly repayments will be for the term of the fixed rate and hence budgeting is easier.
  • When fixed interest rates are low, it makes it favourable.

Fixed rates – cons

  • Break costs can be very high – if you want to pay off your loan or move banks, you may end up paying thousands of dollars.
  • There is a limit on how much extra you can contribute during fixed term. Some banks allow $10,000 extra contribution per year (during the fixed term) and some may allow $30,000 during fixed term. This depends on the bank and you need to check it with your lender or your broker.
  • Offset account is usually not a fully offset account – some banks allow partial offset. So, if you have a lot of surplus cash, fixed rates may not be the right loan. One way to overcome this is to have a split loan with variable and fixed interest rate loans.
  • Banks usually will not let you redraw the extra amount you have contributed into your fixed rate loan.
  • Fixed Interest rate without a package are generally expensive. So, even if you have an offset account and pay the annual package fee, you may not be allowed to offset too much surplus cash!

If you think you may want to redraw or contribute extra surplus cash or extract equity, but still want to enjoy the benefits of the low fixed interest rate, it is still possible! We can show you how it can be structured for your benefit.

When you consider fixed rates, you have an option to rate lock the fixed interest rate by paying fees (generally, pay 0.15% of the loan amount) to lock the rate for up to 90 days. This is possible only once you have found a property and signed a contract of sale. Banks will not let you rate lock for pre-approvals. If you decide not  to pay the fee, your fixed interest rate will be as on the day of settlement.

Variable rate – pros

  • As the interest rates go up or down, so will your interest rate – minus the interest rate discount you were entitled to when you originally signed up.
  • You can usually make unlimited additional repayments without a penalty – either directly into your home loan or into your offset account.
  • You have access to the surplus funds deposited into the home loan as redraw.
  • You have an option to move banks or even discharge your loan when you choose variable rate without incurring a heavy penalty.

Variable rate – cons

  • When interest rates sky rocket, you may regret not fixing your loan for a lower interest rate!

While you do have the choice to change from one to the other, before you choose an option you need to understand the pros and cons of each and also the fees involved. To switch from a variable rate to a fixed rate might only cost you a small variation fee, whereas to move from a fixed rate to a variable rate can cost you thousands depending on the balance of the loan term.

Split loans

Split loans

Many of you may have the burning desire to know what the right ratio is when it comes to splitting loans. For those of you who haven’t heard about it before, lenders usually let you have an option to split your loans.

What this means is that you can have a combination of fixed-variable or variable-variable or even 2 fixed rate loans for the one property.

When fixed interest rates are quite low, it is very attractive to fix your mortgage. But then you have the niggling doubt whether the variable rates will go even lower! Or maybe you are thinking that you may have some bonus or extra money coming in and want it to offset your loan. So, what do you do? The perfect solution is to split your loan and have a fixed and a variable component.

You can have the best of both worlds and can link your variable split to an offset account while enjoying the benefit of the fixed repayments as well. If the variable rate goes up, you at least know that the other split has fixed contribution for the length on the fixed period and you are able to budget accordingly.

Two things to consider when you want to have a fixed portion when splitting your loans. One is the term of the fixed portion. It is generally not economical to break a fixed rate loan. So, you always need to keep in mind that you may not have the flexibility to change lenders or sell or a property during the fixed term.

The second aspect to consider is the ratio to split. There is no hard and fast rule as to how you have to split your loan. Some of you may opt for 50% variable – 50% fixed while others may opt for a 80% – 20% split.


Did you know that you can have two or more variable splits under the one loan? This is done for various reasons. One example is when you may want to have more than one offset account and your bank lets you have one offset account per split. You can then park surplus cash in any of the offset accounts and get it to offset the respective variable loan portion.

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This can be quite popular when you want to refinance your owner occupied loan and use the equity to buy an investment property. This split helps your accountant at tax time to calculate interest paid towards your investment property. Or you may want to split your income into savings and an account for spending. It serves any purpose you need.