Fixed vs variable interest rates

If you’re in the market for a personal, car or home loan, you’re probably having to decide whether or not you want your loan to be attached to a fixed or variable interest rate, or both.

Car, home and personal loans all have different interest rate options attached to them. But what are the different types of interest rates and what is the best interest rate choice for you?

We’re here to help you learn the difference between variable and fixed interest rates so that you can make the best choice for your next loan. 

What is a variable interest rate?

A variable interest rate, as the name suggests, varies depending on market activity.

As with most loans, you’re charged interest on the outstanding balance. For variable interest loans, your interest is calculated based on current market conditions.

The Reserve Bank of Australia (otherwise known as the RBA) guides Australian banks on what’s happening in the current market and what they should do in terms of interest rates based on the cash rate and inflation.

When the RBA releases information, each bank will assess their interest rates and any changes will be at their discretion to reflect the current financial market.

Perhaps you’ve been looking at a variable interest loan? Some of the benefits of variable interest loans are that:

• they can be lower interest rates than fixed-interest loans

• as interest rates decline overall, so can your repayments

• you can usually make extra repayments if you wish or use your redraw.

The only downside to variable loans is if there is an interest rate increase in the market, your payments will increase as well.

We regularly update our interest rates page for all types of loans and credit cards we offer so that you can track this all in one place.

What is a fixed interest rate?

A fixed interest rate, as you probably guessed, remains the same throughout the fixed period of your loan - meaning your repayments will stay the same during this period.

This means your payment stays the same for your loan term.

Some of the benefits of fixed interest rate loans include:

• Interest fees are not impacted by fluctuating markets.

• It’s predictable - meaning, it’s easier to budget.

Most people who prefer to have predictable payments will choose fixed interest rates. This means they don’t have to keep an eye on the market to prepare for any changes in payments that may impact their budget.

The only major downside of fixed interest rates is that if you wish to exit the loan during this period you may be charged a break cost, so it’s important to consider this before making a decision.

With fixed interest loans, you also won’t always have the option for extra repayments, which can be important for some people.

Which should I choose?

The type of interest rate loan you choose really depends on your individual situation. Both fixed and variable interest rate loans each have their own pros and cons.

Some things you should think about before deciding on a variable or fixed-rate loan are:

• Are you on a strict budget?

• What’s the current market like for interest rates in Australia?

• What’s happening in the world? What are the market projections?

• How much is your loan and for how long are you paying it off?

• Do you want to have the option for extra payments?

We do our best to pass on the best interest rates across our products all while being able to maximise the value we provide back to the education and healthcare communities that you are in.