If you’re buying a new house or refinancing you may be asking yourself “do I go variable or fixed interest rate?” Below are some pros and cons of each that should point you in the right direction.
Variable Rate Loans
With variable rate loans you are able to make extra repayments without any penalties which will reduce the amount of interest paid on your loan which can make a huge difference to the overall interest paid on your mortgage.
On a lot of variable rate loans there is the ability to have an offset account. This means you can make your money work for you and save interest on your loan.
When interest rate discounts are given on lending there are usually higher discounts available to variable rates than fixed.
Variable rates are usually flexible which allow you to make changes to them without penalties. This means you can increase your loan or ‘split’ your loan without occurring an interest penalty.
When interest rates are low and going down, so does your variable rate loan.
When interest rates are high and going up, so does your variable rate loan.
Variable rate loans are not consistent. Rates change, sometimes monthly, so your repayments could vary if your bank adjusts their interest rates.
Fixed Rate Loans
Your repayments don’t change because your interest rate doesn’t change. You will have the peace of mind that your repayments will be the same regardless of interest rate changes thus making budgeting simpler.
You can fix a portion of your loan. This means you can have the stability of a fixed rate on part of your mortgage giving you the ability of making extra repayments on the variable portion & knowing what the repayments and rate will be on your fixed loan for the duration of the fixed period.
You can chose how long you fix your rate for. Many lenders have a number of fixed rate options, mostly between 1-5 years and up to 15 years. This means you can fix your rate to suit you.
A lock rate feature is available. This means you can pay a fee to ensure your fixed rate does not change between application date to settlement but this usually comes at a costs.
If the interest rates are going down and you have fixed at a higher rate your interest rate will NOT go down.
There are generally exit fees and charges for breaking a fixed rate loan or making additional repayments. This is not always the case but something to be mindful of when picking your lender or fixed rate period.
There are limited offset options available with fixed rate loans. Most fixed rate loans do not allow offset accounts.
Fixed rate loans don’t generally allow changes to be made, this means you are locked into a rate, term and repayment while your loan is fixed.