Fixed rate versus variable loans

Fixed rate loans

A fixed rate loan is one that maintain the same interest rate over a set period of time regardless of market fluctuations in interest rates.

A fixed rate home loan can offer stability for those conscious of a budget and who want to take a medium-to-long term position on a fixed rate. It can also protect borrowers from the volatility of potential rate movements.

Fixed rates are locked in for an amount of time that is prearranged between you and your lender – this could be a term of one to ten years depending on the lender. Three and five-year terms are generally the most popular for borrowers because a lot can change in that time.

However, fixed rate loans usually come with a few provisos. Borrowers may be restricted to maximum payments during the fixed term and can face hefty break fees for paying off the loan early, selling the property or switching to variable interest during the fixed rate period. Also, you may not be able to leverage an offset account against a fixed rate loan.

Borrowers should consider, and be aware, that at the end of the fixed-rate term the loan will usually ‘revert’ to a variable rate.

Borrowers should talk to their mortgage broker when the end of fixed rate term is approaching as lender offers may not apply the lowest interest rate they offer when a loan reverts to a variable rate.

Variable rate loans

The interest rate on a variable rate loan can change throughout the term of the loan in reaction to market fluctuations in interest rates. The interest rate on a variable rate loan can go up or down.

A variable rate loan may come with features such as an offset account (which can reduce the amount of interest you pay), a redraw facility and the ability to make additional repayments either regularly or in a lump sum.

A variable rate loan can offer flexibility, however, borrowers should consider the capacity to service the loan if the interest rate increased.

Split loans – the best of both worlds

A loan can also be split – this option allows you to have some of your loan at a fixed rate and some at a variable rate. You can split your loan 50/50 or at a ratio that meets your needs.

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Licensing statement: Rayne Finance ABN [70 605 100 838] is authorised under LMG Broker Services Pty Ltd Australian Credit Licence 517192. Disclaimer: (1) As with any financial scenario there are risks involved. This information provides an overview or summary only and it should not be considered a comprehensive analysis. You should, before acting in reliance upon this information, seek independent professional lending or taxation advice as appropriate and specific to your objectives, financial circumstances or needs. This publication is provided on the terms and understanding that: (2) LMG Broker Services Pty Ltd, Rayne Finance (Seed Lending Pty Ltd) and the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication. (3) LMG Broker Services Pty Ltd, Rayne Finance (Seed Lending Pty Ltd) and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to the maximum extent permitted by the law to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication.

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