Fixed or Variable? What does it all mean.

What does a variable or fixed rate mean?

Variable rate

This means your interest rate will go up and down according to the standard variable rate movements of your lender. Often these align with changes from the RBA who meet monthly – but other times your lender will make changes independent of the RBA. A variable rate gives you flexibility (to pay off more, typically to redraw funds, to pay out early without break costs) but the interest rate will change during the life of your loan.

Fixed rate

This means your interest rate will be fixed for a period of time (usually 1-3 years). Fixed loans are less flexible than variable rates, but they offer a known repayment for a period of time which can give you some certainty and help with budgeting. It also protects you against rate increases (after you’ve settled). Unless you have paid a rate lock fee this rate can change in between approval and settlement. Once you’re locked into that rate there are (often substantial) fees if you need to break the loan during that time. There is also often a cap of extra repayments of $10,000 (typically) per year over and above your scheduled repayments. Also – there is typically no redraw on additional funds paid or ability to offset  interest against a fixed component.