Fixed or Variable Rates. What’s the difference?

I regularly get asked, “What’s the difference between a fixed rate and a variable rate?”. When looking to make decisions on your mortgage, it’s good to understand how it all works and more importantly what the most suitable options are for your circumstances.

Below is a list of advantages and disadvantages of each structure. Many people I speak with opt to split their loan to benefit from the pros of both structures.

VARIABLE RATES

Advantages:
• When interest rates drop, your monthly repayments will decrease, meaning you benefit from rate cuts.
• Typically available with a variable rate, you may have access to an offset and/or redraw facility which can assist you to pay off your loan sooner while still having full access to your savings.
• If you are in a position to make extra repayments you can do so on a variable rate without penalty. If you are also thinking of selling in the foreseeable future, this gives you more freedom when the time comes.

Disadvantages:
• With an interest rate that moves with the market, your monthly repayments may increase. This can obviously impact your weekly or monthly budget so it is important to consider how you might manage a rate rise.

FIXED INTEREST RATES

Advantages:
• You know exactly what you are paying each month. Whereas with a variable rate loan your repayments can ‘vary’ as rates change.
• Rate rises won’t effect you – If interest rates rise above your fixed rate, you will be happy knowing you are paying less than the variable rate.
• Loans can be fixed for one, two, three or more years. At the end of the nominated period, your loan will revert to a variable rate with an option to fix again for a further term.

Disadvantages:
• If rates go down below your fixed rate you will be repaying more than the variable rate and you won’t benefit from the rate drop. This can sometimes be frustrating.
• Extra loan repayments are often not allowed if you have a fixed rate, or may only be allowed to maximum amount or with a fee. Variable rate loans usually allow you to make extra repayments at no cost.
• Fixed rate loans may also have a break fee if you change or pay off your loan within the set period e.g. if you sell your home.

If you want to discuss this further I would love to meet with you so call me today.