FIXED vs VARIABLE INTEREST RATES: WHICH ONE?
With the thousands of different rates advertised, constant updates, comparison rates, fixed or variable options and varying lender fees its not surprising that most of us are confused by the scope of choice available to them. So here’s a simple guide to the benefits of fixed and variable loans.
To begin with lets start with a brief description of each type of loan.
Fixed Rate Interest Loans
A fixed rate interest loan is a method of applying interest to a principal amount where the interest rate is set for either the term of the loan or for a set period.
For example, some personal loans offer a fixed term of 15% for the term of the loan (often 5-7 years).
Fixed Rate Mortgage Loans typically offer a set interest rate (for example, 3.95%) for a 1-5 year period.
Some of the advantages of a fixed rate interest loan include;
Consistent repayments makes repayment budgeting easy
- Peace of mind knowing that if interest rates increase your repayments wont
- Some fixed rates may be lower then the advertised variable rate
- If you are planning on changing your income a fixed rate might make it easier to plan ahead
Some of the disadvantages of fixing your interest rate can include;
- If interest rates drop then your rate wont reduce
- Extra repayments are often not allowed or are limited
- Some fixed rate loans are subject to extra fees or charges
- At the end of the fixed rate period you may start being charged a higher rate
We have a fantastic calculator that you can experiment with if you are interested in seeing how a fixed rate loan could affect repayments. You can find this on our website here.
Variable Rate Interest Loans
A variable rate loan means that your interest rate may increase or decrease at a time of the lenders choosing. This decision is influenced by a variety of different economic conditions. In order to either increase or decrease your interest rate the lender must notify you as per the terms of your loan agreement/contract.
Some of the advantages of a variable rate interest loan include;
- Variable rates can be lower then fixed rates at the start of the loan
- Most variable rate loans allow you to make unlimited extra repayments
- Variable rate loans often have a free (or low cost) redraw facility
- If interest rates decrease then the rate you are charged may decrease as well
Some of the disadvantages of having a variable interest rate loan can include;
- If interest rates increase then you may end up paying more interest on your loan
- Variable rates can be more difficult to budget for if your minimum repayments change
We have a useful calculator that you can experiment with if you are interested in seeing how much your repayments would be for a variable rate interest loan. You can find this on our website here.
There is another option if you wish to combine some of the benefits of the advantages of both a fixed and variable interest rate. This is called a Split Loan – sometimes also referred to as a “Partially-Fixed Loan”.
This is a topic for another day, but if you are interested in learning more about a Split Loan then we would recommend you make an appointment with one of our experienced Finance Brokers! Simply send us a message via Facebook or contact us through our website.
Our staff have over 200 years of total experience (many of whom come from different backgrounds – including Financial Planning) and we are dedicated to providing excellent service and first-rate advice. We are committed to serving all Tasmanian’s with offices in Launceston, Hobart and Burnie – so regardless of whether you need a Commercial Broker, Mortgage Broker or a Vehicle Finance Specialist we are here to support you.