What's the difference between a fixed and variable home loan?

In Australia, the primary difference between fixed and variable home loans pertains to the interest rate structure:

1. **Fixed Home Loan:**
  - **Interest Rate:** The interest rate is locked in for a specific period, typically ranging from 1 to 5 years, though some can go up to 10 years. This means your repayments remain the same throughout the fixed term, regardless of changes in the market interest rates.
  - **Stability:** Offers peace of mind as you know exactly what your payments will be, which helps in budgeting and financial planning.
  - **Less Flexibility:** There are usually restrictions on making extra repayments, and breaking a fixed loan can result in significant break fees if you decide to switch loans or pay it off early during the fixed term.

2. **Variable Home Loan:**
  - **Interest Rate:** The interest rate can change at any time, influenced by changes in the wider economy, decisions by the Reserve Bank of Australia, and policies of the financial institution. This means your repayment amounts can vary over the life of the loan.
  - **Flexibility:** Typically allows more freedom to make extra repayments or redraw available funds without penalty. This can be advantageous if you wish to pay off your mortgage faster.
  - **Features:** May offer additional features like offset accounts, which can reduce the amount of interest you pay by offsetting the balance in the offset account against your home loan balance.

**Choosing between the two** depends on your financial situation, risk tolerance, and future plans. A fixed-rate loan might be better if you prefer certainty in your financial planning, especially in a rising interest rate environment. A variable rate might be preferable if you expect rates to decrease, or you value flexibility and the possibility of paying off your loan sooner.

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