Fixed Rate VS Variable Loans
What’s the difference between the two? We’ll explain – in the simplest terms we can – below.
Fixed Rate Loans
A fixed rate loan is a loan that keeps the same interest rate over a set time period, regardless of market fluctuations in interest rates.
This type of loan can offer stability for those wanting to stick to a certain budget, and who want to take a medium-to-long term position on the same rate. It can also protect borrowers from the volatility of potential rate movements.
Fixed rates are locked in for an amount of time that is agreed between you and your lender. This could be a term of one to ten years depending on the lender. Three and five-year terms are generally the most popular for borrowers because so much can change in that time.
Sounds pretty safe? It’s important to be aware that fixed rate loans usually come with a few provisos:
- Borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early, selling the property or switching to variable interest during the fixed rate period.
- You may not be able to leverage an offset account against a fixed rate loan
- That at the end of the fixed-rate term, the loan will usually ‘revert’ to a variable rate.
Borrowers should talk to their mortgage broker when the end of fixed rate term is approaching, as lenders may not apply the lowest interest rate they offer when a loan reverts to a variable rate.
Variable Rate Loans
As the name suggests, the interest rate on a variable rate loan can change throughout the term of the loan based on the market. The interest rate on a variable rate loan can go up or down, at any time.
The upside is that a variable rate loan may come with good features, such as:
- an offset account (which can reduce the amount of interest you pay)
- a redraw facility and,
- the ability to make additional repayments either regularly or in a lump sum.
A variable rate loan can offer flexibility; however, borrowers should consider the capacity to service the loan if the interest rate increased.
And then you have…
A Split Loan: the best of both worlds
A loan can also be split – you can have some of your loan at a fixed rate and some at a variable rate. You can split your loan 50/50 or at a ratio that meets your needs.
Need more information? Want to discuss what type of loan suits you the best? Give us a call. We’re so happy to explore what’s right for you.