Interest rate types explained

Helping you choose the right type of interest rate.

With most types of home loans you can choose either a fixed or a floating (variable) interest rate. Revolving credit home loans and offsetting home loans have a floating interest rate. 

Some people will split the amount they borrow between two loans, one with a fixed interest rate and the other with a floating rate.

Fixed interest rate

A fixed interest rate will not change during the period (term) of the fixed rate that you choose. At the end of your fixed interest rate term you can either choose a new one from the rates available at that time, or change to a floating interest rate.

For

  • You can’t be affected by interest rate increases, so you have the certainty of knowing exactly how much each repayment will be during the fixed term
  • Fixed rates can be  lower than the floating rates

Against

  • If the floating rate falls below your fixed rate during the fixed term, you continue to pay the fixed rate
  • You might have to pay an early repayment charge if you want to make extra repayments or pay off the loan during the fixed interest rate term

Choosing a fixed rate term

  • If certainty and security are important to you, or you believe interest rates may go up during the term, then choose a longer term loan
  • If you believe interest rates may go down in the short term, or if you expect to sell your house in the near future, then choose a shorter term loan

Floating interest rate

A floating interest rate will go up or down as interest rates in the wider market change. You can change to a fixed interest rate at any time, although some types of loans are only available with a floating interest rate.

For

  • You have the flexibility to make lump sum repayments of any size at any time without penalty
  • If interest rates go down, you can potentially pay off your loan faster by keeping your repayments at the same level

Against

  • As the rate is floating  it can go higher than fixed term rates
  • If the interest rate goes up, so will your repayments which could put a squeeze on your budget