How to choose between a fixed and variable loan
When interest rates are rising, it can be hard to choose between a fixed rate loan and a variable rate loan. Let’s dive into the pros and cons.
To start, we’ll clear up the difference between a fixed rate loan and a variable rate loan.
When you get a fixed rate loan, your interest rate stays the same for an agreed-upon period (usually 1, 3 or 5 years). When you get a variable rate loan, your interest rate varies according to the market.
Fixed rate loans: the cons
Missing out on interest savings 😕
Just as your interest rate doesn’t increase when the cash rate goes up, it doesn’t decrease when the cash rate goes down. This creates a risk of missing out on serious interest savings.
Lack of flexibility 💪🏼
Some fixed rate loans don’t let you make extra repayments whenever you like. This can make it difficult to get ahead of your debt.
Leaving can be expensive 🏿
Need to exit a fixed rate loan – or want to pay it out early? Be careful, as you may have to pay early exit fees.
Fixed rate loans: the pros
Given your interest rate stays the same, you know in advance how much you’ll have to repay each month. Set a weekly, fortnightly or monthly amount – and stick with it.
No nasty surprises 😬
Even if the RBA’s cash rate goes up, your interest rate won’t.
Better budgeting 💰
The predictability of fixed rate loans is a boon for budgeters. Keen to cruise the Greek Islands later this year? Figure out how much you’ll need – and start planning without fear.
Variable rate loans: the cons
Your interest rate will likely vary with the market. So, if the cash rate jumps, your interest rate (and repayments) will probably go up.
More planning ✍🏾
Variable rate loans: the pros
Following the market 📈
Your interest rate may go up if the cash rate increases. But, it’s also true that your interest rate may go down if the cash rate decreases. That means you won’t miss out on major interest savings.
Getting ahead 🙌🏻
Many variable rate loans will allow you to make extra repayments and/or repay your loan early, so you can get out of debt faster.
Some variable loans also offer a redraw facility, which allows you to borrow back the extra repayments you’ve made on the loan principal if you need to.
Offsetting interest ⚖️
Pay less interest by setting up an offset account. The amount of money in this account is subtracted from your loan, and you only pay interest on the difference.
What’s the verdict? 👩🏼⚖️
Choosing between a fixed rate loan and a variable rate loan isn’t easy – especially when interest rates are rising.
Fixed rate loans offer predictability. But, this could mean missing out on serious interest savings, especially if you lock in your rate now, when rates are high!
Variable rate loans are less predictable. But, the benefits may include major savings – from enjoying lower interest rates and repayments when the cash rate drops, and the ability to pay off the loan early without paying an extra fee.