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Loans – fixed versus variable

The fixed versus variable loan debate continues regardless of whether interest rates are rising or falling.

 

Variable Rate Loans – Pros And Cons

 Pros  Cons
Your home loan repayments will fall when interest rates fall Your home loan repayments will rise when interest rates rise
Variable rate loans can include a range of extra features, and some loan products have low introductory, or “honeymoon” rates for an initial period before reverting to the standard rate Can also be risky in a rising interest rate market if you’ve overcapitalised on your loan
Variable rate home loans usually provide options and flexibility and will often allow unlimited additional repayments If interest rates rise quickly, your home loan repayments over a certain period of time may be more than those of a fixed interest rate home loan over the same period of time
The average variable interest rate is generally lower than a fixed home loan rate If you have borrowed at or near your repayment capacity, it is risky if interest rate do rise

Fixed Rate Loans – Pros And Cons

 Pros  Cons
You will know how much your loan repayments will be for a fixed period, regardless of market interest rate changes May be less flexible than a variable home loan rate, limiting additional repayment options and excluding the option to redraw
Protects you against interest rate rises If your circumstances change and you want and/or need to exit the loan early, early exit fees will apply
You can pick the time period to suit you; fixed terms are available from 6 months to 10 years Over the term of your loan you may end up paying more than if you had selected a variable home loan, even in a rising interest rate market

Split Rate Loans: The Best Of Both Worlds?

A split rate loan allows you to split your loan amount between fixed interest and variable interest rates. This means that regardless of the economic situation your loan will be partially suited to it. However, it will also mean that you will be unlikely to receive the full benefits of a choice one way or the other.

Such a choice may suit your particular situation if you need some security, but also want the chance to pay off some of your loan ahead of time.

Choosing The Loan That’s Right For You

Although it would be ideal to provide a ‘one size fits all’ answer to the ‘fixed versus variable’ question, the reality is that the choice of loan should be determined by your situation and own financial goals and priorities. You need to take into account your cash flow and need for security and/or flexibility and any costs associated with changing your current loan structure.