Fixed Rate vs. Variable Interest Rates
Interest rates may drop - or they might stay stable. One thing that is for certain is that they will rise again at one point or another.
At the moment interest rates are low compared to long term averages, despite some upward pressure in the last 6 months.
With interest rates still low, choosing between fixed and variable loan products can be tricky. Rates may continue to drop in the immediate future. But no matter what happens in the short term, there is no doubt that rates will go up again over the long-term.
Let’s have a look at the differences between fixed and variable rates.
Fixing your rate gives you confidence around budgeting. You can plan out what you can afford, however, you can only fix for a set period of time - say, three to five years.
Coming out of a fixed rate can be a shock if rates have moved significantly in that time. You should keep an eye on how interest rates are moving so that you can plan for any changes. Look at your household budget and if you need to, make allowances for rate changes so the impact is not so hard.
Be aware that fixed rate loans can carry break costs should you want to repay the loan in full or a substantial principal reduction during the fixed period. Each bank is different - so it’s important to speak to your Adviser.
Choosing a variable rate can carry a bit of risk. Whilst interest rates are low, variable rate holders enjoy the benefits of interest rate cuts. However, should rates rise, their home loan is hit with a rate increase.
Another option is to take a combination of fixed and variable. There are options to split your home loan so that say 70% is fixed and 30% is variable. This means you can benefit from rate cuts, but if they begin to increase, only 30% of your loan is affected.
The key questions to ask yourself are: What do you want to achieve? Do you want consistency in repayments to help budgeting? Or would you prefer to take advantage of low the interest rates of today?
You could consider choosing a variable rate in the short term - for a year or so - and watch the market. When your variable rate expires and if things are moving upwards, you can change to fixed before they rise too much further.
If you decide to go fixed and then want to change to variable - there are usually penalties from the banks to break a fixed term loan.
It’s hard to predict what will happen with the cash rate, but with some extra guidance from your mortgage adviser, you can make a more educated decision.