So what is the difference between fixed and variable rate loans? Which one better suits me?
We deep dive into the differences between the two in this lesson.
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Prefer reading? Here is a transcript of the video:
One of the common questions we get asked from our clients is what is the difference between fixed and variable rate loans? Ryan, which one would you go with? Or Ryan, which one better suits me? Before we deep dive into this, we’ve prepared a short infographic on the difference between the two.
What are the pros and cons of getting a fixed versus a variable home loan?
As a general overview, a fixed rate home loan will have predictable repayment amounts over the fixed term, and a variable rate home loan may not. However, variable-rate home loans tend to be more flexible than fixed-rate home loans with more features like redraw facilities and the ability to make extra repayments.
What are the pros of a fixed-rate home loan? If you get a fixed-rate home loan, your payment amount will not fluctuate for the length of the fixed period, usually one to five years. So, what are the cons of a fixed-rate home loan? If home loan rates go down, your rate will stay the same, and this can be frustrating. Early repayments of the loan may incur break costs which can be substantial as well many lenders limit additional payments to the loan.
What are the pros of a variable rate home loan? If interest rates go down, so can your required payments if you choose to decrease accordingly. If you have surplus cash each month or want to make a lump sum deposit, you can pay off your principal without any penalty. So, what are the cons of a variable rate home loan? Your interest rate and repayments can change at any time, so it can be unpredictable. Another option is to make a bet both ways and fix only a part of your total home loan and leave the remainder on a variable rate, thus giving some stability.
Now that you know the difference between fixed and variable rate loans. The question is, which one suits you? Well, this depends on your individual circumstances, and you’ll need to contact us to have a discussion on which one better suit you. One of the questions you should ask yourself is how comfortable is the current loan repayment? If rates increase, will you be under pressure? If so, you may lean towards a fixed-rate loan. If the loan is quite manageable and you can repay this comfortably even if rates increase, maybe you should go with a variable rate loan.
If you want the flexibility of a variable rate and the peace of mind of a fixed rate, you can explore what’s called a split loan which enables you to have the best of both worlds where you can have a variable rate loan to make your extra repayments and a fixed-rate loan to have let’s say the peace of mind of your repayments in the future.
Again the most important thing to note here is everyone’s circumstances are different. Unfortunately, there’s not one size that fits all, and just because let’s say your friend went on a variable rate or your friend went on a fixed rate might not be the best situation for you.
I’ll always welcome you to contact us to get some advice!
Disclaimer: The information provided on this website is for general education purposes only and is not intended to constitute specialist or personal advice. This website has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should consider the appropriateness of the advice to your own situation and needs before taking any action. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy.