To fix or not to fix – that’s certainly the million-dollar question! Unfortunately, there is no hard and fast answer and each person will view the topic in his or her own way. The most important thing is to understand the different loan types and assess which will most closely suit your lifestyle and/or loan requirements.
A fixed-rate loan charges a set rate of interest that doesn’t change over the duration of the fixed-rate loan term. Fixed-rate loan terms vary and are generally set for between one to five years, depending on what is chosen by the person taking out the fixed-rate loan. At the end of the loan term, the loan reverts to the lender’s current variable rate.
The Pros Of A Fixed-Rate Loan
Ideal for those with an unpredictable income or who may feel the strain of a rate increase, a fixed-rate loan means repayments will be exactly the same every fortnight/month. For some, this offers peace of mind as rates/repayments can’t increase and individuals can budget and know what they will be spending over their fixed-rate loan term. It’s important to note though, that if market interest rates drop over the loan term, the fixed rate will stay unchanged.
The Cons Of A Fixed-Rate Loan
Alternatively, for those who want to pay off as much of their loan as possible, a fixed-rate loan can be restrictive. That is, you are limited when making extra repayments and if you go over the limit you will be charged a fee. Furthermore, most lenders don’t allow you to redraw from your loan during the fixed-rate loan period and there are high break fees if you choose to pay out your loan during the fixed-rate period.
A variable-rate loan charges a varied interest rate that can rise and fall at any time, depending on market conditions. Unless you decide to lock in a fixed rate, your rate will be variable over the life of your loan.
The Pros Of A Variable-Rate Loan
Suitable for those who have a steady and secure income and are comfortable with variations in interest rate repayments, a variable-rate loan means repayments can differ each month depending on the current interest rate. While increased rates aren’t desirable, if rates drop dramatically, those with a variable-rate loan won’t be stuck in fixed contracts. Those who choose a variable-rate loan can also enjoy the benefits of variable-rate features, including the ability to make unlimited extra repayments, as well as redraw from the loan at any time. A 100 percent offset account can also be utilised, reducing interest as well as the term of the loan.
The Cons Of A Variable-Rate Loan
While it offers plenty of features and benefits, a variable-rate loan is always a risk, as interest rate changes can’t be predicted. If interest rates rapidly increase, repayments will also, and you need to ensure you can cover the extra interest you will be paying.
THE BEST OF BOTH WORLDS
For those who like the idea of both loan types, you can choose to fix a portion of your loan and keep the rest as variable. This ensures you aren’t exposing your entire loan to market fluctuations, yet you can still make extra repayments and benefit from features including offset accounts for a portion of your loan.
For a confidential discussion with one of our credit advisers about which loan product will suit you, please don’t hesitate to contact us on 1300 PODIUM or firstname.lastname@example.org.