To Fix or Not to Fix?
Making the decision on whether to fix your interest rate or leave it variable is a difficult one that is worth careful consideration and research.
It is helpful to consider that there is a significant amount of competition between lending institutions on their fixed rates. The fixed rates offered can differ significantly. It would be beneficial to shop around and compare before making a decision.
Making the choice to fix interest rates is a gamble but appeals to many, especially as interest rates continue to increase.
Fixed
A fixed rate remains at the same amount for a specific period of the loan, which is usually 1-5 years. This shields the home owner from any future interest rises. While on a fixed rate, you have stability with repayments because they will be the same every month.
Who would a fixed Interest Rate Suit?
A fixed interest rate would be ideal for individuals who prefer the predictability and security of how much they are expected to pay over the coming years. An interest rate that is locked in at a certain figure is perfect for home owners on a limited budget. However, fixed interest rates can often be higher than variable rates. Changing from a fixed interest rate can also be more costly than if you were to switch from a variable interest rate.
Disadvantages of Fixed
The main disadvantage of choosing a fixed interest rate loan is that they are usually higher than variable rate loans. Changing from a fixed interest rate can also be more costly than if you were to switch from a variable interest rate. You will also find that secured interest rates don't have as many features.
Variable
Variable rates are the most popular choice, when it comes to interest rates. It is highly flexible and has an array of additional features. When the rate figure is low, home owners can receive large savings.
Disadvantages of Variable
The inability to foresee future interest rates can make this a risky option as rates can increase or drop without warning. It is also very dependant on current economic conditions.
Split
The option of a split loan allows you to have the best of both worlds, if you aren't entirely keen on settling exclusively with one or the other. A portion of the home loan can remain fixed for a certain period of time. The portion of the split can be adjusted to the percentage that suits the individual. A 50/50 split is what is commonly chosen but a 60/40 split is also popular. The home owner can then experience the additional features associated with variable rates. Penalties also apply to a split loan if you choose to end the fixed period before its scheduled end date.
The process of switching between variable and fixed can incur fees. The resulting charges can sometimes outweigh any potential savings gained from changing rates.
The choice between fixed or variable rates have both their advantages and disadvantages. It may be helpful to discuss with a financial advisor which one would best suit your individual needs and circumstances.
