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Interest rates are one of the most important factors when it comes to home loan shopping. But which one is best suited to you?

Variable rate

The interest rate on a variable rate home loan fluctuates depending on the cash rate and your credit provider. This means that the interest rate will move up and down with the market.

While variable rate home loans are a common choice for borrowers, it has both pros and cons:


  • Flexibility These loans usually have more features available such as extra repayments, redraw and an offset account, which can help the borrower save more money.

  • Easier to refinance: As you are not ‘locked in’ for a fixed period, you have the freedom to change loans or lenders throughout the loan term.

  • Rate cuts: If the RBA cuts the cash rate, most lenders will pass this rate cut on, which means your repayments will be lower.

  • Gradual adjustment: If interest rates increase, these will occur over a period of time which gives you time to re-adjust your budget for increased repayments. If you are struggling, you can make adjustments gradually to reduce your expenditure and increase your income.


  • Rate increases: Even though you will receive rate cuts, it also means you could receive rate increases. This can be difficult for those who have trouble budgeting.

  • Unpredictable repayments: As mentioned above, rate cuts and increases can occur, which may make it harder for borrowers to budget for home loan repayments.

Fixed rate

A fixed rate is when you lock in an interest rate for a certain number of years, usually 1-5 years. As the interest rate determines what the repayment will be, fixing your rate will mean that your repayments will remain the same for the fixed period.

There are a number of pros and cons that you will need to weigh up.


  • Repayment stability: During the fixed period, you will know exactly what your repayments will be each month. You can budget well in advance and is especially handy when you are on a tight budget or going from two incomes to one on the birth of a child. Repayment stability is also handy for budgeting for investment property loans.

  • No rate increases: If the cash rate increases or the lender changes their rate, you will not be affected by it during the fixed term.


  • Miss out on rate cuts: While you don’t have to worry about rates increasing, it also means you will miss out on lower repayments if the interest rate is cut.

  • Restrictions on features: Some lenders won’t offer as many features with their fixed rate home loans. You may miss out on extra repayments, free redraw and an offset account if you go with a fixed rate home loan.

  • Break costs: If you decide to refinance or sell your property during the fixed period, you may be charged a break cost which could equate to thousands of dollars.

  • Uncompetitive revert rate: You can only fix your rate for a certain number of years. Once it ends you can either re-fix or it will revert to a variable rate. You need to factor in how competitive this rate is upfront as you may be faced with having to refinance after the fixed rate period to secure a more competitive variable rate.

  • Repayments can jump suddenly: If you have timed it right and interest rates rise during your fixed period, you will be protected from these up until the fixed period expires. Depending on how much rates have risen you could be faced with a sudden significant increase in repayments rather than increases occurring gradually.

Split home loan rate

A split home loan is when you divide your home loan amount into multiple portions. You choose how much to allocate to each portion and what type of interest rate that applies. For example you could divide your loan into variable and different fixed portions, 5 year fixed, 3 year fixed, 1 year fixed etc).

A split loan gives borrowers both certainty and flexibility knowing that they are partially protected when interest rates rise, but they can still benefit from lower repayments when the variable rate is reduced.

Loan splits can also be useful to separate the loan for tax purposes or if you have consolidated debt, to keep this amount separate so you can focus on paying it off as quickly as possible.

Honeymoon rate

Lenders offer a honeymoon or ‘introductory’ rate and these can be really attractive. A honeymoon rate is advertised as significantly lower for the first year or two and then reverts to a higher rate for the remaining term. While it may sound good at first, there are both pros and cons to this type of loan.


  • Reduced repayments in the first few years may help first home buyers get used to mortgage repayments

  • Borrowers can use this time to pay extra off their home loan

  • The discount will apply when the loan is at its highest do get maximum benefit from the lower rate.


  • The variable interest may not be the most competitive in the market after the honeymoon period

  • Borrowers may struggle to meet higher repayments when the interest rate reverts back

  • Home loan features may be restricted like offset account, free redraw, limits on the ability to pay extra etc.

  • Can come with higher setup and ongoing fees that add up over time.

  • Before applying for a home loan with a honeymoon interest rate, do your research. Find out what the interest rate will be when the introductory period ends and also see what other restrictions apply.

Comparison rate

When home loan shopping, next to every interest rate advertised you will also find a comparison rate. At first glance this may tell something about the loan without studying the fine print.

The comparison rate is calculated by adding the interest rate and any fees and charges that you will pay on the loan. This percentage rate then gives the true total cost of the home loan. So what does it tell you:

  • If the comparison rate is the same and the interest rates – there are no setup and ongoing fees.
  • If the comparison rate is higher than the interest rate – there are fees on this loan. If it is only a few percentage points higher it may mean there are some setup fees. Ongoing fees will increase the comparison rate quite a bit so if it is more than a few percent there is probably ongoing fees.
  • If the comparison rate is lower than the interest rate – this could occur if the rate actually goes down over time, so for example if the lender offers a loyalty bonus drop in the rate after a number of years

So should you use the comparison rate to determine the best loan for you? Yes and no. The comparison rate is based on a loan amount of $150,000 over 25 years. If your loan amount or loan term is different to this it won’t be accurate. Ideally you need to get a personalised comparison rate that gives you the rate tailored to your specific loan. This will tell you if ongoing fees with a lower interest rate may actually result in a lower overall cost. Apart from interest rates and fees, there is a lot more to consider including features, lenders customer service etc.

Find out more about what a comparison rate is here.

How to compare interest rates

  • The Key Facts Sheet:The Key Facts Sheet will give you a personalised comparison rate which includes the ongoing fees and interest rate for your specific loan amount. This information will help you compare different lenders and their rates side by side.
  • For a Key Facts Sheet for a State Custodians loan Click Here

  • Use comparison websites: Comparison website compare a number of different lenders and home loan products. Simply type in the type of home loan you are interested in and you will be able to compare them side by side.
  • Create your own list: While comparison sites are a great place to start, you may also need to dig a little deeper and speak to different lenders yourself. They can take a look at your financial situation and give feedback on which interest rate may be most suitable for you.

If you are not sure about what type of interest rate would suit you best, we can help. The team at State Custodians can provide you with the right information about the different types of home loans available and discuss your options with you one on one. To chat to our friendly team, give us a call on 13 72 62 or leave your details here and they will contact you.