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Fixed or Variable -
Which one to choose?
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A fixed rate mortgage
retains the same interest
rate throughout the course
of the term. Homeowners
benefit because they're
given a fixed monthly
payment that they can
effectively budget for and
it won't change with the
market. However, because the
interest rate risk is placed
on the lender, fixed rate
mortgages tend to have a
slightly higher interest
rate.
A variable rate or floating
mortgage changes its
interest rate depending on
the economic index and interest rates
set by the Reserve Bank of
Australia.
While borrowers will
typically get a lower
opening interest rate,
they're subject to the
changes of the market.
Overall, variable rate
mortgages tend to be cheaper
than fixed rate loans.
Why choose a variable
rate
This largely depends on your
overall financial position.
If your income is strong
and you
can easily afford to make
additional repayments over
your regular repayments then
a variable rate loan may be
best option. This can help
reduce the term of your
mortgage and increase the
amount of equity in your
home providing your home
value remains constant or
increases.
Another reason to consider a
variable rate if interest
rates in the medium to long
term are going to remain
constant or are likely to
fall then a variable rate
may be the best option.
Why choose a fixed
rate loan
Fixed rate loans a better
for the more conservative
type borrower who would like
to know what their exact
repayments are going to be
from month to month. This
allows them to budget each
month for their home loan
repayments.
Fixed rate loans are also
advantageous if interest
rates are likely to rise in
the medium to long term. By
locking in a fixed rate you
are likely to save a
significant amount on
interest repayments while
interest rates are rising.
The main disadvantages with
fixed rate loans is that
they are not as flexible as
variable rate loans. Most
fixed rate loans restrict
the borrower in the
following ways;
- limiting the extra
repayments you can make
- do not allow you to redraw
funds
- most fixed rates do not come with an offset
account
- there may be break costs
for getting out of the loan
early
If you are unsure whether a
fix you loan or go for a
variable rate option then
consider a split loan.
Split Loans
Split loans are a
combination of variable and
fixed rate loans. You can
have a percentage of the
loan as variable while the
other percentage fixed. You
can have half fixed and half
variable, 70% variable and
30% fixed or any combination
you prefer.
These loans are for
borrowers who want to hedge
their bets. They give the
borrower the flexibility of a
variable loan and the
security of a fixed loan.
Generally, taken out when
the direction of interest
rates are rising or when
they have no clear
direction.
For more information
click on the following links
Variable Rate Home and
Investment Loans
Fixed Rate Home and
Investment Loans
Split Rate Home Loans
Variable Rate Loan
Comparison
Fixed Rate Loan Comparison
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