Fixed or Variable or Both?
The question of whether to consider looking at Fixed Rates or Variable Rates has been one that has confused borrowers over the years – and continues to do so now.
What’s the answer ……..?
When looking at interest rates (whether it be for a home loan or an investment property) there are in general 2 types of loans to consider – fixed or variable??
There are a number of factors that you need to weigh up to help you make this decision such as –
• Loan flexibility & features
• Impact of rate increases on your budget
• Will you have an addition to the family in the near future
• How long you intend to hold the property
Just to name a few.
The gap between fixed rates & variable rates is probably as close as it has ever been (it’s a pretty competitive market place at the moment), so you also need to have an understanding of the differences in flexibility that each product offers. Whilst this can differ between lenders it can be summarised as follows –
Fixed
• Interest rate is fixed in for a period of time (generally 1 – 5 years). During this time your repayments are locked in and won’t change.
• Can generally be locked in again for a further fixed period at the end of initial term, or reverts to a variable rate.
• Additional repayments available (ask your broker as this varies between lenders) but can be limiting, with penalties applicable if you pay more than what your lender allows.
• Penalties can be significant if you break the loan early (i.e. sell the property whilst on a fixed rate)
• Redraw – not available with a lot of lenders
Variable
• Interest rate can rise or fall at any stage – generally in line with what the Reserve Bank does
• More flexible with most allowing unlimited extra repayment
• Redraw available
• 100% offset account available
• Loan can be topped up/increased
• Portable if you change properties
Still confused?
If this hasn’t helped at all, you can always consider a split loan option. This will offer you the best of both worlds as it means splitting your total borrowings and putting some on a fixed rate & some variable. This way you can set and forget a portion of your borrowings on a fixed rate, whilst also retaining the flexibility that the variable rate offers. How the borrowings are split is up to you but we commonly see people opt for a 50/50 split.Remember, not all lenders are the same, so contact your local Zobel broker who will be able to give you the low down on an option that will suit your needs.
