Variable or Fixed Rate Loan: What’s best for you?

One of the most important decisions when acquiring a loan is whether you should go with a variable or fixed rate. Both have their pros and cons but one may suit your financial goals better. It is essential that you know the differences and how each can benefit you.

Fixed Rate
A fixed interest rate allows you to lock in a rate for a specific period during the loan term. The fixed rate period can range from 1 year up to 10, depending on each bank’s offerings. The obvious advantage is you are protected against rising interest rates, which results in higher repayments. However you also miss out on potential savings if it falls. Another major benefit of having a fixed rate is that it allows you to accurately budget, as you know exactly what your repayments are going to be.

The cons to having a fixed rate are that penalties will be payable if you wish to pay off or refinance the loan during the fixed rate period. Also most have none or limited additional repayments, which can be a source of frustration if you want to pay off your loan early.

Variable Rate
Variable rate loans, as the name suggests means that the interest rate can fluctuate. Most of the changes are triggered by the cash rate changes from the Reserve Bank of Australia. As a general rule of thumb, if the cash rate drops so should your repayments (as a result of interest rate falling), however if they rise your repayments will increase. This can make it difficult to budget as repayments can become unpredictable. Although a key advantage is that additional repayments are allowed so you can pay off your loan quicker if you wish to.

Combination Rate
Why not have the best of both worlds with a combination loan? Have part of your loan on fixed and the remainder variable. Most lenders will offer this option. Your loan is basically hedged, so regardless of the economic situation your loan will be partially suited to it. The catch is that you won’t get to experience the full benefits of either.

Which loan is best for you?
As a general guide, if you expect the cash rate to be higher than the offered fixed rate for a majority of your term then go with a fixed rate. On the flip side if you predict it will be lower then choose a variable rate loan. It is important to realise that interest rates cannot be controlled and are always changing. They are affected not only by events in Australia but globally, which makes them impossible to predict accurately. There will always be risk for both but the decisive factor should be which option is best suited for your financial needs.

Finance Detective can find the best loan that is tailored to your financial needs. Call (08) 9289 7777 to talk to one of our experts.