Fixed rate versus variable loans

Fixed rate versus variable loans

For most home buyers, they need to consider what the most suitable loan structure might fit their needs and financial situation when they seek their home loan finance. GOP Mortgage Solutions will explain to the customers, especially the first home buyers what the difference between Fixed rate and variable rate and what would be the ideal one for them.

Fixed rate loans

A fixed rate loan is one that maintain the same interest rate over a set period regardless of market fluctuations in interest rates.

A fixed rate home loan can offer stability for that conscious of a budget and who want to take a medium-to-long term position on a fixed rate. It can also protect borrowers from the volatility of potential rate movements.

Fixed rates are locked in for an amount of time that is prearranged between you and your lender – this could be a term of one to ten years depending on the lender. Three and five-year terms are generally the most popular for borrowers because a lot can change in that time.

However, fixed rate loans usually come with a few provisos. Borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early, selling the property or switching to variable interest during the fixed rate period. Also, you may not be able to leverage an offset account against a fixed rate loan.

Pro’s:

Lenders are more likely to offer cheaper fixed interest rates, in these turbulent times, than variable rates.

You will know exactly how much your repayments will be during the period, giving you a greater sense of comfort and reassurance.

There are more competitive fixed rate loan deals in 2021

Con’s:

You may not be allowed to make extra repayments on your loan, and certain lenders may even have a cap on additional payments.

Fixed rate loans may have limited loan features available to borrowers.

You could incur “break costs” if you refinance your fixed rate loan before the fixed term officially ends.

Borrowers should consider, and be aware, that at the end of the fixed-rate term the loan will usually ‘revert’ to a variable rate.

Borrowers should talk to their mortgage broker when the end of fixed rate term is approaching as lender offers may not apply the lowest interest rate they offer when a loan reverts to a variable rate.

Variable rate loans

The interest rate on a variable rate loan can change throughout the term of the loan in reaction to market fluctuations in interest rates. The interest rate on a variable rate loan can go up or down.

A variable rate loan may come with features such as an offset account (which can reduce the amount of interest you pay), a redraw facility and the ability to make additional repayments either regularly or in a lump sum.

A variable rate loan can offer flexibility, however, borrowers should consider the capacity to service the loan if the interest rate increased.

Pro’s:

Variable rate home loans are normally lower than fixed rate home loans.

When interest rates drop your loan repayments will also fall.

Variable loans provide options that allow borrowers to make extra repayments, and this can be of great aid, if you wish to pay of your loan faster.

Con’s:

If interest rates rise, your loan repayment will also subsequently rise.

It is more likely that you would have paid more on your loan repayments, than if you were on fixed term loan over the same time period.

There could be higher uncertainty in cash flow, as rates can change at any time.

A split loan – the best of both worlds

A loan can also be split  – this option allows you to have some of your loan at a fixed rate and some at a variable rate. You can split your loan 50/50 or at a ratio that meets your needs.

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