One of the most common questions our clients ask is “What’s better, fixed or variable?”
While there isn’t a one size fits all answer to this question, it’s important to understand the difference between the two and make an educated decision based on your future plans.
The short version is; fixed rates give you certainty while variable rates give you flexibility.
Certainty from fixed rates comes from your rate being locked in at a certain percent for a pre-determined period of time, for example you may choose to have a $500,000 mortgage fixed at the rate of 4.5% for a three year period, this would mean your monthly repayments would be $2,534 for three years.
If rates were to go up during that period you wouldn’t be affected but in turn, if rates were to go down you wouldn’t receive that benefit either. There may also be restrictions on any additional repayments you may wish to make, which is another point to consider.
What you have is the certainty of knowing what your repayments will be.
Fixed Pro.
Repayments remain unchanged if there is a rate rise during the fixed period.
Budgeting and planning may be easier as you know what your loan repayments will be for the fixed term.
Fixed Con.
If interest rates are reduced during your fixed term you won’t receive any benefits.
Extra repayments may be limited and there could be substantial break costs if you decide to pay the loan off during the fixed term.
Variable loan rates fluctuate meaning the rate you pay can increase and decrease. As a guide banks follow the Reserve Bank of Australia’s Cash Rate, but they are free to move rates up and down at their discretion.
The flexibility of a variable loan product comes from the control you have as a borrower. Variable rate professional packages often allow you to make unlimited extra repayments without penalties and have additional loan features such as offset accounts and redraw facilities which can assist you in paying your mortgage off in a shorter period of time.
Continuing from the above example, if you have a $500,000 loan on a variable rate product at 4.5% and the lender increases the rate to 5% your monthly repayments will increase from $2,534 to $2,684. However, if the lender reduced the interest rates from 4.5% to 4% your monthly repayments would decrease from $2,534 to $2,387.
Variable Pro.
Repayments decrease if the lender lowers their rates.
Unlimited extra repayments and additional loan features such as offset accounts and redraw facilities.
Variable Con.
Repayments increase if the lender raises their rates.
Less certainty regarding repayments when making long term financial plans.
Still can’t decide? There is also an option that allows you to hedge your bets and have a combination of the two. This is called a split loan. You may choose to have combination that is 50% fixed and 50% variable or a 20/80 split or 30/70 split.
Ultimately the choice is yours and the “better” option is the one that is the most appropriate for you and your situation.
Disclaimer: This is general information and should not be taken as personal advice. Please contact your Medico Finance Australia finance specialist on 1300 115 740 or info@medicofa.com.au if you would like to discuss your specific situation. The above example is based on a 30-year loan term and does not take any additional fees and charges that may be payable into account.