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Fixed vs Variable Rates

Fixed vs Variable RatesFixed Vs Variable Rates.

“Should I go with Fixed or Variable Rates or should I fix them?” 

 

A common question amongst many looking to take out a loan.  Which is best for you the client depends on many different personal and external factors.

External Factors include:-

  • The Economy
  • Cash Rates
  • Lenders

Personal Factors include:-

  • Stage of Life, single, married, starting a family
  • Purpose of Loan
  • Forecasting personal changes such as jobs and income.

These factors are all quite dynamic thus knowing how to get the perfect result that will last the life of the loan requires someone with the ability to accurately forecast the future – something we all wish we had!!

With the ever changing environment one can only go based on what they believe is the best option for them at that point in time.  As a result the client must way up pros and cons of each option, illustrated in the table below.

 

  Fixed Variable
Pros
  • Security of knowing your monthly repayments will remain the same for the fixed period
  • In an rising interest rate market your rates will remain fixed and thus lower than variable rates
  • Are usually more flexible
  • Usually these loans do not cap or charge on extra repayments
  • Usually these loans offer extra features
Cons
  • Early exit fees if you wish to switch from Fixed
  • Some fixed loans cap or charge on any extra repayments
  •  Repayments are not locked in and thus can increase with interest rate increases

 

There is an option for clients to split their loans and have a taste of both worlds.  For example a loan of $400,000 split 50/50 $200,000 on a fixed rate, and $200,000 on a variable.  In this case the borrower is still subject to changes in the interest rates, but the impact is limited to the repayments on the $200,000 split.

Now that you have seen the pros and cons of variable vs fixed and appreciate that there is a possibility to split the loan, how do you make the decision?

Our Advice….

Our advice would be to sit down with your broker and discuss:-

  1. What are the best and average variable rates on offer today?
  2. What are the best and average fixed rates on offer today?
  3. How these respective rates will affect your cash flow?

Having this discussion with your broker will arm you to make the best decision for your personal situation.

Contact Us to start this important discussion.

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