The Reserve Bank of Australia (RBA) has cut the cash rate, and it seems likely there will be more cuts to come in 2025. All Big Four banks are anticipating at least two cuts this year and some say there may be up to five cash rate reductions.
So, should borrowers opt for a variable home loan rate or a fixed one? Or a bit of both with a split rate? The answer depends on what’s important to you.
Here, we explain your options.
Variable home loans
The benefit of a variable home loan is that the interest rate you pay will move up and down in line with market interest rates.
If the RBA cuts the cash rate again in 2025, your lender may pass on the reduction in your interest rate (though this is not 100% guaranteed), which will result in lower repayments. If the RBA puts the cash rate up, your interest rate could go up too.
Variable home loans tend to come with more flexibility and features than fixed rate loans. Examples include interest-saving features like redraw facilities and offset accounts.
You may also be able to make extra repayments without copping a fee, thereby paying off your home loan sooner.
Fixed home loans
With a fixed rate home loan, your interest rate will stay the same for the duration of the fixed period (usually from one to five years), irrespective of market interest rates.
The key benefit is that you’ll know exactly what your repayments will be and can budget accordingly.
If the RBA increases the cash rate, you won’t be affected, but you also won’t benefit if the cash rate goes down again.
In the past, fixed rate home loans were typically a lot less flexible than variable home loans. However, nowadays some lenders do allow you to make extra repayments (usually up to a limit) on fixed home loans. Certain lenders also offer redraw facilities or offset accounts on fixed-rate loans.
However, if you want to sell the property or refinance, you may be up for a break fee. While break fees are typically not charged on variable rate loans, you might face a discharge or settlement fee to cover admin costs, which usually range from $150 to $400. On fixed-rate loans, break fees can still be quite hefty, so it’s important to think through your long-term plans before committing.
If lenders expect the cash rate to fall, the fixed rate tends to be lower than the variable rate. Some lenders have already reduced their fixed-rate home loans in anticipation of future cash rate cuts by the RBA, so it’s worth exploring your options.
Split rate home loan
With a split rate home loan, you can lock in a portion of your mortgage under a fixed rate and leave the rest variable.
This gives you the best of both worlds. The fixed-rate portion provides certainty, so you’ll always know what your repayments will be for that part of the loan. Meanwhile, the variable portion of the loan offers flexibility and the potential to benefit from any interest rate cuts.