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[MoreMore Tips] Fixed Rate vs. Variable Rate - How to choose wisely?

Updated: May 7, 2021

It would help if you considered the repayment interest rate when you apply for a home loan. Generally, you have two options – fixed interest rate or variable interest rate.


It is a common dilemma for many borrowers because they need to factor in their capacities and economic climate. You can ask MoreMore Finance at no costs to get expert advice on the right loan for you.


This guideline highlights on:

  1. The main advantage of a fixed rate is the stability, which prevents borrowers from taking the risk of rising interest rate and planning budget effectively.

  2. The main advantage of variable rate is the flexibility in terms of ability to take offset account, making extra repayments, comparative lower break cost, etc.

  3. Another option – make both ways that fix only a part of your total loan, and leave the rest on a variable rate.



Fixed interest rate

In a certain amount of time (usually 1-5 years), the fixed loan interest rates are predictive. That is, your repayment amounts will not fluctuate over the fixed loan period, regardless of how the official interest rate changes. At the end of the fixed loan period, the loan will convert automatically to a variable interest rate for the remaining time left of your loan.


You may need to consider rate lock if you choose a fixed rate. Because the fixed rate might change over the period from the loan’s offer to its closing, you may decide to lock in the interest rate for a certain period. It will protect you against a rise in the interest rate during the lock period. For further information related to rate lock, you can ask MoreMore Finance with no costs.


Pros

  • Stability of repayments. The main advantage of a fixed rate, meaning borrowers have a fixed interest rate and therefore fixed loan repayments, as well as a predictable future budget.

  • Enjoy rate lock facility. Repayments do not rise if the official interest rate rises, which avoids the risk of rising interest rates.


Cons

  • No offset account and redraw facility. Fixed-rate loan products usually do not have these features. Therefore, you could not use offset account to reduce interests you pay.

  • Limited extra repayments. Many lenders do not allow extra repayments or limit additional payments to the loan.

  • Take no advantage of falling interest rate. If the official interest rate goes down, your rate will stay the same meaning your repayments do not fall.

  • Limited flexibility. In most cases, if you break a fixed-rate loan term, including refinancing, early pay off the loan, selling property etc., it may incur break costs which can be substantial. If you want to convert the loan to a variable rate, you have to wait until the end of the fixed term; otherwise, you may be charged penalties.



Variable interest rate

Your interest rate will fluctuate approximately in parallel with the official interest rate for the loan period’s length. So your repayment each month can change at any time, affecting by the current economic climate.


Pros

  • Allow extra repayments. Loan products with variable rate usually allow borrowers to make extra repayments. If interest rates go down, you may have surplus cash, and you can decide to make extra repayments. This practice allows to pay off your loan faster without any extra costs.

  • Offset account and redraw facility. Many variable-rate loan products have attractive features including offset account and redraw facility. Offset account could reduce the amount of interest you pay.

  • More flexibility. You won’t be charged substantial break costs if you plan to change loan products, refinance, or other changes.


Cons

  • Things are unpredictable. Your interest rate and payments can change at any time, and thereby you can’t know a more precise future cash flow.

  • Potential stress of repayments. A variable rate brings the risk that your repayments will increase if interest rate increases.



How to choose between the two rates?

The fixed rate might be a good option in the following situations:

  • You have needs for regular repayments and more precise budgeting.

  • You want to avoid the risk concerned about the official interest rate rises, which decreases the potential stress of repayments each month.

  • As you may be new to the market, you wish to have peace of mind when applying.

  • With a variable rate, you can’t ensure to afford higher loan repayments if interest rates rise.


The variable rate might be a good option in these situations:

  • You can make extra repayments.

  • Higher possibility of contract change, including early closure of loan account, selling property, refinancing, etc.

  • You don’t want to lock the loan interest rate.


Another option - splitting your loan

You perhaps consider making both ways that fix only a part of your total loan and leave the rest on a variable rate. It brings both stability and flexibility. It’s up to you that the ratio you want to assign between the two options. You can ask MoreMore Finance for some expert advice on the right portion.



Still can’t decide yet? You can reach MoreMore Finance out for some expert advice. We will find out your borrowing capacity and analyze what will happen to the interest rates in the future. Ask us with no costs to get expert advice on the right loan for you.



To sum up, there are pros and cons to each option. Borrowers need to decide based on their needs and capacity. If you don’t know how to do so, feel free to ask MoreMore Finance. We could provide insight into each option’s pros and cons and ultimately work out the right loan for you.




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Please call at 1300 613 883 for a free-cost consultation.

Or, simply fill the form [enquire now], we will go back to you in 24-hour.

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