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Pros and cons of fixed rate loans versus variable rate loans

When it comes to choosing between fixed rate loans and variable rate loans, borrowers need to weigh the pros and cons of each type to determine which is best for their financial situation. Both types of loans have distinct features that can significantly impact the cost and predictability of borrowing. We know, it sounds like choosing between a headache and a migraine, but we’re here with the painkillers and the dark room. Let us help you figure it out. 

Two cats in a little model house

Fixed rate loans


1. Predictability: The primary advantage of a fixed rate loan is its predictability. You know exactly how much you'll pay each month, just like you know that your cat will knock something off the counter every morning. This stability is beneficial for budgeting and long-term financial planning.

2. Protection from interest rate fluctuations: Fixed rate loans shield you from the risk of rising interest rates. Imagine having a magical umbrella that keeps you dry no matter how wild the financial weather gets.

3. Simplicity: Fixed rate loans are straightforward, making them easier to understand for many borrowers. No surprises, unlike that time you thought you could successfully cut your own hair during the Covid lock down. 


1. Higher initial rates: Fixed rate loans often have higher initial interest rates compared to variable rate loans. This means higher monthly payments and potentially more interest paid over the life of the loan. It's like paying extra for guac—sometimes worth it, sometimes not.

2. Lack of flexibility: Once locked into a fixed rate, borrowers cannot take advantage of falling interest rates unless they refinance, which can involve additional costs and paperwork. Imagine being stuck with dial-up internet while everyone else enjoys high-speed fiber. Fun times.

3. Potentially higher long-term costs: If market rates decrease, fixed rate borrowers could end up paying more in interest over time compared to those with variable rates. Think of it as buying a concert ticket at full price only to see it go on sale the next day.

4. Limited features: Fixed rate loans often come with fewer bells and whistles. Limited extra repayments and no offset accounts, or redraw facilities. It's like buying a high-end smartphone without a camera—fancy, but lacking the essentials.

5. Early termination penalties: Want to get out of your fixed rate loan early? Get ready to pay through the nose. Lenders may charge you hefty fees for the privilege, making it almost as painful as sitting through a four-hour meeting that could have been an email.

6. Rate lock fees: The rate you’re promised might change before your loan settles. To keep it locked in, you’ll likely pay a fee. Think of it as paying extra to ensure your overpriced coffee stays exactly as mediocre as you ordered it.

Variable Rate Loans


1. Lower initial rates: Variable rate loans often start with lower interest rates than fixed rate loans. This can result in lower initial monthly payments, making them attractive to borrowers seeking to minimise upfront costs. Kind of like getting a coupon for half-off on your favourite brand of existential dread.

2. Potential savings: You know how you might find a $20 bill in your old coat pocket - once every decade? Well, if interest rates decline, borrowers with variable rate loans benefit from lower monthly payments and reduced overall interest costs.

3. Flexibility: Some variable rate loans come with features that allow borrowers to convert to a fixed rate or make additional repayments without penalties, offering more flexibility in managing the loan. It's like having the power to change lanes on a traffic-jammed highway without getting honked at.


1. Uncertainty: The biggest downside of variable rate loans is the uncertainty. Monthly payments can increase if interest rates rise, potentially straining the borrower’s budget. Fancy playing a game of financial Russian roulette—what could go wrong?

2. Complexity: Variable rate loans can be more complex, with terms and conditions that may be harder to understand. Borrowers need to be aware of how rate changes are calculated and the potential for significant payment fluctuations. It's like trying to assemble IKEA furniture without the instructions.

3. Risk of increased costs: Have you ever signed up for a free trial only to find out later it wasn’t so free after all? In a rising interest rate environment, variable rate loans can become more expensive than fixed rate loans, increasing the financial burden on borrowers.

4. Budgeting challenges: Variable rates mean your monthly payments could be all over the place. Planning your finances becomes as predictable as a cat’s mood.

So, which is better?

Determining which loan type is better depends on the borrower's financial situation, risk tolerance, and market conditions. Fixed rate loans are generally better for borrowers who value stability and predictability in their payments and want to avoid the risk of rising interest rates. They provide peace of mind and are easier to budget for over the long term—like choosing the least uncomfortable rock to sleep on.

On the other hand, variable rate loans might be more suitable for borrowers who can tolerate some uncertainty and are looking to capitalise on potentially lower interest rates in the short term. It's a bit like betting on that new diet fad—you might end up healthier or just perpetually hungry.

So… for most borrowers seeking financial stability and predictability, fixed rate loans are typically the better choice. However, for those with a higher risk tolerance and a shorter borrowing horizon, variable rate loans can offer significant savings. Each borrower must assess their own circumstances and preferences to make the best decision—like choosing between that overdue dentist appointment or renewing your drivers license, not hugely exciting either way, but both with important future implications. Book a consult today and we’ll help you figure out which option is going to suit you best. 


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