Fixed vs Variable loans
Choosing the wrong home loan could cost you thousands. If you’re about to take out a large loan, it is helpful to understand the advantages and disadvantages of fixed and variable home loans. Below we examine the pros & cons of fixed and variable loans.
Choosing the wrong home loan could cost you thousands. If you’re about to take out a large loan, it is helpful to understand the advantages and disadvantages of fixed and variable home loans. Below we examine the pros & cons of fixed and variable loans.
What is a fixed loan?
A fixed loan provides you with a specific interest rate for a set period of time. This rate may be slightly higher or lower than the variable rate depending on what the banks believe the economy and interest rates will be doing in the future. If interest rates are believed to be increasing, the fixed rate will be slightly higher than the variable rate. Conversely, if interest rates are forecast to drop, the fixed rate may be the same or slightly lower than the variable rate.
What is a variable loan?
A variable loan will simply follow the market, and increase or decrease depending on economic factors.
Should you fix your loan?
The main advantage of a fixed loan is certainty. This is because it ensures your repayments will not change for a set period of time, helping you to plan ahead. If interest rates are currently low, and you signs point to them rising significantly, fixing at a low rate could save you money and lower the total amount of interest paid over the loan term.
The drawback is if you have fixed your home loan and interest rates go down you will not benefit from the decreased rate. This means that you will be paying higher interest than the market. Additionally, if you are on a fixed rate and want to switch to a variable rate or would like to refinance or sell your property, you will likely have to pay a break cost which can be quite high depending on how long you have had the fixed term for. There may also be restrictions on making additional payments, however these can often be handled with offset accounts that decrease the overall balance you will be paying interest on.
What we say:
Only in hindsight will you know if you have made the right decision, however many borrowers choose to fix a part of their loan, effectively hedging their bets and limiting their exposure. Speak to one of our broker partners about your lending options to find out more.
