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Fixed vs Variable Home Loans: Advantages & Disadvantages

There is always a great deal of debate in the media around fixed versus variable home loans, so how do you know which to pick? Canstar can help.

There was no RBA move on the official cash rate throughout 2017, but with or without changes in the official cash rate, variable and fixed home loan rates have been on the move for years. And while it’s too early to predict what home loan rates will do in 2018, borrowers remain quite interested in fixed rates at the moment.

It’s not altogether surprising. Currently, on Canstar’s database (as at January 29, 2018) the average standard variable home loan rate for owner occupiers is 4.42% p.a., while the average 3-year fixed home loan rate is 4.10% p.a..

Compare Home Loans Interest Rates

Fixed rate home loans still popular in Australia

Hundreds of thousands of Australians compared home loans with Canstar From January to December 2017, giving us a wide range of insights into what Australian homebuyers are looking for in a mortgage.

The number of people searching for fixed-rate home loans on our website has decreased slightly since our last ratings, showing that some Australians think interest rates may yet go down further!

The majority of home loans searches on our website are still for people looking for a fixed rate home loan; where this figure was once 64% in July 2016, 86% of visitors to our site now search for fixed rate home loans.

Of those who are searching for a fixed rate home loan, the most popular fixed terms are as follows:

Fixed rate term included in search filters Percentage of visitors
1-year fixed rate 13%
2-year fixed rate 20%
3-year fixed rate 29%
5-year fixed rate 24%
Source: Canstar Home Loans Database.

Based on visitors comparing home loans on our website from January 1, 2017, to December 31 2017. 

To filter your home loan search by a certain fixed rate term, use our home loans comparison page:

Compare Interest Rates for Fixed or Variable Rate Home Loans

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 homeowner or are setting up a business, 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.

Try out our Home Loan Repayments Calculator to get an idea of how much a new rate will cost you per month:

Mortgage Monthly Repayments Calculator - Canstar

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 on Canstar’s database (as at January 29, 2018), 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!

Arm yourself for the negotiations by comparing home loans by fixed rate, variable rate, and features offered, with Canstar’s expert star ratings:

Compare Home Loans

What about split home loans?

In a split home loan, you break your loan into two halves – one charged at a variable interest rate, the other fixed. Splitting allows you to make the most of both types of home loans, helping you pay less in interest both monthly and over the life of the loan.

The loan continues onto a variable rate when the fixed period ends.

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 3.49% p.a.
2-year fixed rate 3.65% p.a.
3-year fixed rate 3.69% p.a.
4-year fixed rate 3.99% p.a.
5-year fixed rate 3.99% p.a.
Source: Canstar Home Loans Database.

Rates current as at 29 January 2018.

Based on residential loans available for $350,000, 80% LVR and principal and interest repayments.

If you’re looking for a fixed loan, the following three tables display a snapshot of fixed-rate products on Canstar’s database.  These have been sorted by advertised interest rate (lowest to highest). Please note that this table features products that are based on a loan amount of $350,000 with an LVR of 80% in NSW.

1-year Fixed Home Loan Products

2-year Fixed Home Loan Products

 3-year Fixed Home Loan Products

Compare Home Loans

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. Last 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.

The charts below show when, over the past 20 years, home buyers have theoretically done better by fixing their home loan for a term and when they have done better by choosing a variable rate.

In the first table below, we have highlighted the difference between the fixed rate and the variable rate available in each year, to show how much was potentially saved or lost in interest payments.

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.

Please note that where each graph shows a flat line on the horizontal axis, it means that it’s still too early to tell whether that particular loan term is ahead or behind the variable rate as yet as it hasn’t yet matured.

retrospective look at when fixing has been favourable

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.

retrospective look at when fixing for 1 year has been favourable

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.

retrospective look at when fixing for 3 years has been favourable

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.

retrospective look at when fixing for 5 years has been favourable

With all of the tables above, it’s important to remember that past interest rates are not an indication of future interest rates.

Just how much is your home loan costing you? How much could you potentially be saving? Try out our Home Loan Comparison Calculator to get some ideas.

If you’d rather split your loan and fix the rate for a portion of your loan while leaving the rest on a variable rate, give our Home Loan Split Calculator a go to see how that could work out for you.

Split Loan Calculator - Canstar

Home Loans Star Ratings - Canstar

Learn more about trends in the home loan market and the latest interest rates on offer, with our Home Loans Star Ratings report:

Home Loans Star Ratings - Canstar

Learn more about Home Loans

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