Choosing your first home loan can feel overwhelming. Should you pick a fixed rate for stability or a variable rate for flexibility? Understanding the differences can help you make a more informed choice and possibly save on interest over time.
In this guide, Unconditional Finance explains the pros and cons of fixed and variable home loans to help you make a confident decision.
What Is a Fixed Home Loan?
A fixed-rate home loan means your interest rate stays the same for a set time (usually 1 to 5 years). This means your repayments won’t change, even if interest rates rise or fall.
Key features of a fixed loan:
- Predictable repayments – Your monthly mortgage payments remain consistent, which can make budgeting easier.
- Protection from interest rate hikes – If the RBA raises the cash rate, your repayments are unlikely to be affected during the fixed period.
- Less flexibility – Many lenders limit extra repayments, and break fees may apply if you refinance or exit early.
- Fixed term expiry – Once the fixed term ends, your loan will likely switch to a variable rate unless you renegotiate another fixed term.
A fixed loan may be a suitable option for first-home buyers who prefer financial certainty and want to protect themselves against potential rate increases.
What Is a Variable Home Loan?
A variable-rate home loan fluctuates based on the lender’s rate changes, which are influenced by the RBA cash rate and broader economic conditions. This means your monthly mortgage repayments could increase or decrease over time.
Key features of a variable loan:
- Potential savings when rates drop – If interest rates decrease, your repayments could also decrease, depending on lender adjustments.
- Flexible repayment options – Often allow extra repayments, which may help you pay off your loan faster and reduce interest costs.
- Offset and redraw facilities – Many variable loans include these features, helping to lower interest costs while giving you access to extra funds if needed.
- Repayment uncertainty – If interest rates rise, your monthly repayments will also increase, potentially stretching your budget.
A variable loan may suit borrowers who don’t mind rate changes and want flexibility for extra repayments.
Fixed vs. Variable Home Loans: What’s the Difference?
Feature | Fixed Home Loan | Variable Home Loan |
Interest Rate Stability | Fixed for a set period | Changes with the market |
Repayment Amount | Stays the same | Can increase or decrease |
Extra Repayments | Often restricted | Usually allowed |
Break Fees | Can be expensive | Typically minimal |
Offset/Redraw Facilities | Limited availability | Commonly included |
Refinancing Flexibility | Less flexible due to break fees | Easier to switch lenders |
The choice between fixed and variable loans depends on your financial goals and risk tolerance.
Fixed vs. Variable Home Loans: Pros & Cons for First-Home Buyers
Pros of Fixed Home Loans
✅ Stable repayments – Can make it easier to plan a budget with less concern about rate hikes.
✅ Protection from interest rate rises – Even if the market rate increases, your loan stays the same.
✅ Peace of mind – May suit first-home buyers who prefer financial certainty.
Cons of Fixed Home Loans
❌ Limited flexibility – Extra repayments may be capped or restricted.
❌ Break fees – Exiting the loan early can be expensive.
❌ Potential missed savings – If rates decrease, you won’t benefit from lower repayments.
Pros of Variable Home Loans
✅ More flexibility – Allows extra repayments and access to offset accounts.
✅ Potential savings if rates drop – Could reduce the total interest paid over time.
✅ Easier refinancing – Switching to a better deal is often simpler than with fixed loans.
Cons of Variable Home Loans
❌ Repayment uncertainty – If interest rates rise, your mortgage payments could increase.
❌ Harder to budget – You may need a financial buffer to cover potential rate hikes.
❌ Market-dependent savings – Lower repayments aren’t guaranteed and depend on economic conditions.
Should First-Home Buyers Consider a Split Loan?
If you can’t decide between fixed and variable loans, a split home loan may be worth considering. This option lets you divide your mortgage into both options.
- Fixed portion – Offers repayment stability and protects against interest rate increases.
- Variable portion – Allows flexibility for extra repayments and access to offset accounts.
For example, a borrower might choose 50% fixed and 50% variable to balance risk and flexibility. However, split loans can be more complex to manage, so it’s important to check lender terms before committing.
Things to Think About Before Choosing a Fixed or Variable Loan
Choosing the right home loan isn’t just about the current interest rates. First-home buyers should consider:
Current Market Trends
Are interest rates expected to rise or fall in the next few years? If rates are projected to increase, locking in a fixed rate may provide stability, whereas a variable loan could offer benefits if rates decline.
Financial Stability
Can you handle potential repayment increases if rates go up? If your budget is tight and you need certainty in your monthly expenses, a fixed loan might be more manageable, while a variable loan may suit those with a financial buffer.
Loan Features
Do you need access to an offset account or redraw facility? Variable loans often come with these features, which could help reduce interest costs, whereas fixed loans typically offer fewer flexible repayment options.
Long-Term Goals
Are you planning to refinance, pay off your loan early, or upgrade to a new home in a few years? If you expect to sell or refinance within a short period, a variable or split loan might offer more flexibility, as fixed loans can have break costs for early exit.
Risk Tolerance
Are you comfortable with fluctuating repayments, or do you prefer consistency? If you can handle the uncertainty of changing interest rates, a variable loan could offer potential savings, while a fixed loan may be a better choice for those who want financial predictability.
Practical Tips for First-Home Buyers Choosing Between Fixed and Variable Loans
Compare multiple lenders
Don’t settle for the first offer; shop around to find a competitive loan option. Interest rates, fees, and loan features can vary significantly between lenders, so comparing options could help you secure a more competitive home loan.
Use mortgage calculators
Use a mortgage calculator to see how rate changes could impact your budget. This can help you pick a loan that works for your finances.
Consult a mortgage broker
A Sydney mortgage broker can assess your financial situation and help identify loan options that align with your needs. They can also provide access to specialist loan products and lender deals that may not be available directly to borrowers.
Check loan flexibility
Review terms for extra mortgage repayments, break fees, and refinancing options. Some loans may limit how much you can repay ahead of schedule or charge high exit fees, which could affect your ability to switch loans or pay down debt faster.
Stay informed on RBA cash rate movements
Interest rate decisions can influence home loan costs. Keeping track of RBA announcements and economic forecasts may help you anticipate market trends and make informed decisions about fixing or refinancing your loan.
Conclusion: Which Home Loan Type Is Right for You?
The decision between a fixed and variable home loan ultimately depends on your personal circumstances. If you prioritise stable repayments and peace of mind, a fixed loan may be worth considering. If you want flexibility and potential savings, a variable loan could be the better choice.
A split loan could give first-home buyers the best of both options. No matter what you choose, researching lenders and getting expert advice can help you find the right loan. Understanding loan types, your finances, and market trends can help you make better homeownership decisions.
If you’re unsure which loan structure suits you best, speaking with a mortgage expert could provide clarity and help you explore the most suitable options for your needs.
Frequently Asked Questions
This depends on your financial situation and comfort level with changing interest rates. A fixed-rate home loan may be a good option if you prefer stable repayments and want to protect yourself from potential rate increases.
On the other hand, a variable-rate home loan might suit you if you’re comfortable with some uncertainty and want the flexibility to make extra repayments or benefit from possible rate reductions.
If you’re unsure, we can help assess your situation and guide you toward the most suitable option.
If you lock in a fixed rate and interest rates go down, your payments won’t drop unless you refinance.
However, refinancing a fixed loan can come with break fees, which might outweigh the potential savings. We can help you evaluate whether fixing your loan is the right choice based on current market trends and your financial goals.
Many lenders require a minimum 5–20% deposit, but some first-home buyer schemes could allow eligible buyers to purchase with a smaller deposit. Your borrowing capacity will depend on factors like your income, expenses, credit history, and existing debts.
As mortgage brokers, we can help you check your eligibility, compare lenders, and explore options like low-deposit loans or grants.
Yes, but there may be break fees if you leave a fixed loan early. The cost depends on your lender and how long is left on your term.
If you think you might want the flexibility to switch later, we can help you explore split loan options or find lenders with more flexible fixed-term conditions.
We work with multiple lenders to find a home loan that matches your financial goals, borrowing capacity, and lifestyle needs.
Instead of doing all the research and negotiations yourself, we compare rates, explain loan features, to help you secure a competitive loan.
Whether you are considering a fixed, variable, or split loan, we provide guidance to help you make an informed decision that aligns with your financial goals.
