Should I Choose Fixed or Variable Rates?

Unsure whether to go with a fixed or variable rate for your loan?

As a historical rule, fixed rates usually cost more than a variable rate mortgage and fixed rates are generally higher than variable rates. However, fixed rates offer confidence in repayments where there is tight cash flow or an uncertain economy and there are times in the market where fixed rates stay well below the variable for extended periods, which improves the benefit of a fixed rate.

Variable rate loans fluctuate with the market according to the Reserve Bank of Australia’s “cash rate” and what portion of this lenders pass on to the consumers. Variable rates are a reflection of the current economic climate with the RBA utilising the cash rate as a tool to try to control inflation up or down. Variable rates are traditionally favoured by investors and are usually the first choice of consumers as generally a fixed rate is higher than a variable rate in a steady economy.

So, what’s the best option for you? Whilst we can’t make the decision for you, here are some helpful tips when considering both;

1. Don’t stretch yourself too far – Leave a buffer for either option choice. Even with an affordable fixed term rate, the term will eventually run out.
2. Understand the loan terms and product clearly – What are the application, on-going fees, penalties, repayment conditions, redraw, offset options for the types of products you considering – lending products and lenders will vary considerably.
3. Look ahead – If you are considering selling, releasing equity or paying out the loan early, a variable may be a better option or ensure the fixed term falls in line with your plans or break costs may be incurred.
4. Do you want to make extra repayments – Then consider the fixed rate policy for the max you can pay over a period. Some lenders allow a higher amount, so compare lending policy. If large payments are required then a variable rate may be a better option.