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One of the major choices to be made when choosing a home loan or a loan on a residential
investment property is whether to take a variable interest rate or a fixed interest rate.
A fixed interest rate will not change during the fixed period. During the fixed period the
borrower knows their repayments will remain unchanged.
A fixed rate loan is also advantageous if variable interest rates rise. When variable interest
rates rise a borrower with a fixed interest rate is relatively better off because their
rate will remain unchanged.
Conversely if interest rates fall a borrower with a fixed interest rate is relatively worse off
because they do not benefit from the fall in variable rates.
A variable home loan interest rate should move up and down with market interest rates. The main
determinant of variable home loan interest rates is the cash rate set by the Reserve Bank of Australia.
When the Reserve Bank alters the official cash rate, most variable home loan interest rates change
by a similar, if not identical, amount.
Home loans with a variable interest rate usually have the highest repayment flexibility. The norm is that
the borrower can pay out their loan without penalty.
The Fixed or Variable Interest Rate Simulator allows the borrower to analyse the choice of a fixed or variable
rate by modelling changes in the variable interest rate and comparing the amount repaid during the period
and the outstanding loan balance at the end of the period.
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