When you are borrowing, you can have all your loan amount either variable rate loan or fixed rate loan. Depending on your needs, you can also make it hybrid, i.e. part fixed and part variable. The brief descriptions of these loans are as below:
Variable rate loan: The interest rate is left variable. Every time and again, your lender reviews their funding costs and determines the interest rate they would like to charge you. If the rate goes up, as a result, your home loan rates go up and if it goes down, your rate goes down too. With this loan, you can make unlimited extra repayments if you want to and offset account is also connected to the loan account. This means any extra money you have on your offset account reduces the interest on your home loan. The downside of this product is that there is no certainty on the rate movement.
Fixed rate loan: You can fix interest rate on your home loan for a set period (from 1 year to 7 years, for example). Most popular fixing periods are for 1 year, 2 years and 3 years. When your rate is fixed, you continue to pay the same interest rate no matter what happens in the lender funding costs. If the rate goes up, you still pay the same rate that you fixed at.
If the rate goes down, then again you can’t change to variable rate as you continue to pay the pre-set rate until expiry. If you want, you can break the fixed rate agreement anytime but this comes with the breaking costs. Please check with your lender before taking any such action.
In case you have some extra money that you want to pay towards the loan amount, such fixed-rate loans may not allow more than a certain amount during the period. The offset account will not work (with some exception of the special loan products) when you have fixed interest rate loan product.