Fixed vs Variable Interest Rates
Knowing the difference between fixed and variable interest rates helps you understand how it will affect the costs of your repayments of your loan and allow you to make a decision on which repayment method you’d prefer.
Fixed interest rates stay the same during the entire period of repaying a home loan. This keeps the monthly installments for a home loan or car loan at a constant and the interest rates won’t fluctuate with the market. A fixed interest rate is great if you prefer knowing every installment price will stay the same, which allows you to plan financially for the future and lets you take a “set and forget” approach to your home loan. Fixed interest rates also protect you from rising interest rates in the market.
The opposite is also true, where if interest rates fall you will not be able to take advantage of those rates. This means that fixed interest rates are inherently less flexible. Whether a fixed interest rate will be suitable for your loan depends on the market during the time you apply for your home loan. If the fixed rate you can achieve is significantly lower than the variable rate, and you believe that rates are going to rise during the fixed period, it means that now is the time to strike! It’s also worth keeping in mind that fixing your rate means that it might be harder to move your loan to another bank while the rate is fixed at your current bank.
Variable interest rates, unlike fixed rates will change as a response to changes in the market. This means you won't have a constant interest rate for your monthly installments. Variable interest rates are great to take advantage of decreasing interest rates and gives you more flexibility in your loan. Furthermore, variable interest rates often come along with a host of additional features, such as offset accounts, the ability to make extra repayments to pay down your loan faster, or a simpler process to switch between banks that should all be considered when fixing your interest rate.
Information Disclaimer:
Any advice provided is general and does not take into account individual objectives, financial situation and needs. All individuals should consider whether the advice is suitable for them and their personal circumstances.
