If you have heard of the fixed versus variable loan debate, then you’re going to want to read this article. The conversation continues regardless of whether interest rates are rising or falling. We discuss the pros and cons or both and other options to what to consider.
Variable rate loans – Pros vs cons
Pros
Your home loan repayments will fall when interest rates fall
Cons
Your home loan repayments will rise when interest rates rise
Pros
Variable rate loans can include a range of extra great additions, and some loan products have low introductory, or “honeymoon” rates for an initial period before reverting to the standard rate
Cons
It can also be risky in a rising interest rate market if you’ve overcapitalised on your loan
Pros
Variable rate home loans usually provide options and flexibility and will often allow unlimited additional repayments
Cons
If interest rates rise quickly, your home loan repayments over a certain period and it may be more than those of a fixed interest rate home loan over the same period of time
Pros
The average variable interest rate is generally lower than a fixed home loan rate
Cons
If you have borrowed at or near your repayment capacity, it is risky if interest rate do rise
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Fixed Rate Loans – Pros And Cons
Pros
You will know how much your loan repayments will be for a fixed period, regardless of market interest rate changes
Cons
It can be less flexible than a variable home loan rate, limiting additional repayment options and excluding the option to redraw
Pros
Having a fixed rate, protects you against rising interest rates
Cons
Fees will apply if your circumstances change, and you want and/or need to exit the loan early.
Pros
You work on your own time and what time period that suits you; fixed terms are available from 6 months to 10 years
Cons
Over the term of your loan you may end up paying more than if you had selected a variable home loan, even in a rising interest rate market
Now you know the difference as well as the pros and cons lets dive a bit deeper into splitting them in half.
Split Rate Loans: The Best Of Both Worlds?
A split rate loan allows you to split your loan amount between fixed interest and variable interest rates. This means that regardless of the economic situation your loan will be partially suited to it. However, it will also mean that you will be unlikely to receive the full benefits of a choice one way or the other.
Such a choice may suit your particular situation if you need some security, but also want the chance to pay off some of your loan ahead of time.
Choosing The Loan That’s Right For You
Although it would be ideal to provide a ‘one size fits all’ answer to the ‘fixed versus variable’ question, the reality is that the choice of loan should be determined by your situation and own financial goals and priorities. To begin answering this, take into account your cash flow and need for security and/or flexibility and any costs associated with changing your current loan structure. And you will find your perfect answer.
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What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.
