Fixed or Variable?
When considering a loan one of the first things that an investor or home buyer has to consider is whether they want a fixed or variable loan. In either case it is a decision based on your goals, your resources and is tied up with a solid plan to ensure you make the best informed decision available to you at that time.
Fixed Interest Loan
Advantages:
- If rate is already low, locking the rate in longer is beneficial
- Provides certainty in repayments and peace of mind
Disadvantages:
- Once locked in you cannot ‘unlock’ without a substantial fee
- The interest rates may lower further and you cannot take advantage
Variable Interest Loan
Advantages:
- Flexibility surrounding the ability to change repayments
- If rates drop, interest payments drop with it
Disadvantages:
- If rates increase, interest payments will increase, putting you at risk financially
- Instability, no peace of mind
There are certain situations in which a fixed interest loan is considered the best. For example, if you are purchasing a house on a single income and your repayments have an income ceiling; rising interest rates may put you into arrears or worse. Also if you are considering any major life changing events such as childbirth, then having the stability of a fixed loan would also provide peace of mind and financial planning abilities surrounding the life event.
Those who prefer a variable rate are usually predicting interest rates to stay relatively low or continue to be lowered by the RBA in the future. If the prediction is correct, substantial savings can be made over the course of the loan period. There are also hybrid fixed and variable loans that may be an option for those with specific circumstances.
In either case, it is best to undergo extensive planning surrounding your loan and consider what is the most important factors you require. Only then will it become clear which way you should opt for your loan product.
For more advice contact Alert Property Group today.
