Education Centre

Fixed vs. Variable

To fix or not to fix? This is a question many people are considering in the current climate of rising interest rates.

Fixed Rates

A fixed rate is just that: the rate that your loan settles at will stay fixed for the period you have chosen.

• Having set monthly repayment amounts for the whole fixed period.
• Being protected against any possible future variable rate rises.

• Restrictions may apply on any extra repayments you make into the loan.
• Any extra repayments you do make may not be able to be redrawn again.
• There may be penalties which apply if you break your fixed rate term.
• If variable rates decrease lower than your fixed rate, you will be paying more than you otherwise might have been.

After a fixed rate term expires, you have the choice of renewing your loan with another Fixed Rate for a set period, or reverting to a Variable Rate loan.

Remember that the great majority of loan terms are over 30 years. If you chose in the beginning to fix for 4 years paying interest only, and at the end of that time decided to revert to a variable rate, your monthly payments would be worked at over a term of twenty-six years. The effect of this is that your monthly payments may increase depending on what variable rate your loan converts to.

Variable Rates

A variable rate will vary according to the condition of the economy as determined by the Reserve Bank of Australia and market forces.

• Greater flexibility, such as the ability to make and redraw additional repayments
• If your variable rate falls, you may be making lower repayments than if you had fixed your rate.

• If the variable rate rises, your monthly payments increase.

Historically, higher interest rates prevail for only short periods of time, from a few months to a couple of years. When the higher rates have achieved the desired result of slowing an economy that is growing too fast, rates will start to come down again.

Should I choose a Fixed Rate?

Many experts say that fixed rates are a better option in a rising interest rate environment; however, the benefits gained in the short term may not be enough to counter the lack of flexibility associated with these loans.

• Your work situation
• The length of time you expect to stay in your property
• Whether you plan to have children
• Any prospects of increases in your income

Always remember, it is difficult, even for the experts, to predict which way interest rates will go.