Comparing Variable and Fixed Rates
Wednesday 23 November 22
What is a Variable interest rate?
A variable interest rate is a rate that may fluctuate over time, as it’s based on an underlying benchmark index that changes periodically. So, if your interest rate was to decrease, your loan repayments would also decrease, and vise versa, if your interest rate was to increase, your loan repayments will also increase.
Example a $400,000 loan over 30 years with a variable interest rate of 4.5%, the repayments will be $2,026 per month.
If the interest rates were to increase to 5%, the repayments would increase to $2,147 per month, and if interest rates were to decrease to 4%, the repayments will also decrease to $1,909 per month.
The main advantage to a variable interest rate is its flexibility. You are allowed to make unlimited extra repayments, and with that, you have the potential to pay off your home loan faster (without incurring interest rate break costs). With a variable interest rate, you are offered more loan features like offset accounts or redraw facilities. These features work to reduce the loan balance you pay interest on, while also allowing you to have access to any surplus funds.
Click the highlighted links to view more about these features!
When you start to find that your interest rate may not be currently the cheapest, you’re not happy with your current lender, or want to get some extra cash for a car purchase, it tends to be easier to switch lenders or home loan products on a variable interest rate, without getting charged break fees.
The main disadvantage of a variable interest rate is not having certainty of your next repayment. As interest rates can increase and decrease, your repayments may not be the same all the time. This can affect budgeting, and cash flow.
What is a Fixed interest rate?
A fixed interest rate is a rate that is locked in for the fixed period (the fixed period usually ranges from 1 – 5 years). This means, while the interest rates may be fluctuating, your interest rate is not affected during the fixed period. This also allows for you repayments to stay the same. This can help with budgeting and cash flow, knowing that the repayments will stay the same. But with that, if interest rates were to decrease, you are locked in to paying a higher interest rate as you fixed the loan.
Example a $400,000 loan over 30 years with a 3 year fixed interest rate of 4.5%, the repayments will be $2,026 per month
If the interest rates were to increase to 5%, you would still stay at 4.5% with a monthly repayment of $2,026 per month (a variable rate would be $2,147 per month at 5%)
If the interest rates were to decrease to 4%, you would still stay at 4.5% with a monthly repayment of $2,026 per month (a variable rate would be $1,909 per month at 4%)
After the fixed period is up, you will revert to a variable interest rate. You may be offered to re-fix your loan after the period has ended.
With a fixed rate, you are given less flexibility, compared to a variable rate. You will be limited to making extra repayments. This will depend on the lender; some will allow a certain amount per year and others per the fixed period. You may be charged fixed break fee costs (depending on how long you have left on your fixed period), if you were wanting to refinance, sell your property, or pay off your loan in full while still being on a fixed rate. Usually, fixed products won’t allow you to redraw unlimited funds over the fixed period or link an offset account to the home loan.
If you’re still not sure what interest rate may suit you most, book an appointment here to have a chat to Beth.