Fixed vs Variable Interest Rates

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With home loan interest rate on the market dropping to a low 1.69%, now may be the perfect time to switch lenders, negotiate a new loan or even enter the market.

While falling interest rates may be attractive to homeowners or those ready to purchase for the first time, there is a reason for their depletion, and the uncertain economic conditions driving the rates down should be factored into your own personal circumstances.

So, is it the right time to be taking up a fixed-rate home loan and how does this differ from variable interest rate loans?

What is a fixed-rate loan?

A fixed-rate means that the interest rate is locked in either for the life of the loan or for a portion of it. It is rare to find a loan that offers a fixed rate beyond a period of about five years, but it does pay to shop around as some lenders offer competitive packages. In most cases after the initial fixed-rate period, the loan will switch to a variable interest loan.

What are the benefits of a fixed-rate loan?

The key benefit is that with a fixed rate you know exactly how much your repayments will be each time for the duration of the fixed-rate period. This can help with budgeting, particularly in the long term, if you happen to lock in a longer fixed-rate period.

Fixed-rate loans also tend to carry fewer administration fees.

What should I be wary of?

If interest rates were to drop, then you would not be able to enjoy the benefit. Given how low-interest rates are currently, however, it may be more beneficial to take advantage of the low rate rather than waiting for them to descend further.

Switching from a fixed-rate loan can also incur higher break fees, which is to deter people from jumping from loan to loan.

What is a variable interest loan?

A variable interest loan’s rate is at the mercy of the market. It can change depending on market conditions, meaning it can either go up or down.

What are the benefits of a variable interest loan?

If you decide to look for a better deal down the track, it is usually easier to switch to another lender or even another loan product at your current financial institution. If the interest rate drops drastically lower than your current rate, you may also have some room to negotiate a rate change that could last for a longer period than a fixed-rate loan.

What should I be wary of?

If you like to keep to a strict budget then a variable interest loan may not be for you. Since the rate can change, so can your mortgage payments, which can be stressful if you aren’t left with much of a buffer each payday.

Can I combine both types of loans?

Yes. Some lenders may offer a combination of the two types of loans, commonly referred to as partially-fixed. You may be able to set up half of your mortgage with a fixed rate and the other half with a variable rate. In these circumstances, the fixed-rate usually switches over to a variable rate after a certain amount of time, but the flexibility of the combination may save you more money in the long term.

Each home loan has pros and cons and will benefit different borrowers in different ways. If you are considering taking out a home loan or shopping around for a new one, our mortgage brokers can assist in finding a loan that best suits your financial situation and long term goals.