Home Loan Interest Rates – Variable Vs Fixed
When is it Prudent to Have Interest at the Variable Rate or Fix it?
Jun 20, 2009
In the current financial market with the interest rates at an all time low, it is very tempting to stay on the variable rate. The other reason that people opt to stay on the variable rate is the uncertainty where the market is concerned. In Australia, in the past 18 months, cash rates were low and then went up regularly and then suddenly started going down again (source: RBA). Now no one is sure which way the movement is going to be. With the current media talk of recession, everyone is hoping for further downward movement and opting to stay on the variable rates.
Variable Rates
Having a home loan on a variable rate of interest gives more flexibility. Currently:
- There are very low discounted rates of interest
- No penalties for paying of additional amounts off the capital
- No penalty rates for early payouts
Of course one of the obvious disadvantages is that the rate can rise every time the Reserve Bank raises the cash rate or even at the whim of the lending institution.
Fixed Rates
When a home loan is fixed, it is for a specified period of time – most commonly 3 years, but it can be for any term from 1 to 10 years. The advantage is the fact that the rate does not go up during the chosen period irrespective of whether the market rate increases, However, the disadvantages are:
- Having to pick the right time to fix rates
- Decide on the amount of the loan and the period
- The rate remains the same even if the market rate drops
- There are restrictions on paying off additional capital
- Penalties are imposed for early repayment of the loan
If making the decision between Variable and Fixed is too hard, then one way to hedge your bets is to have a Split Loan – half variable, half fixed. This still leaves the question of how long to fix it for? This depends on individual circumstances of what plans the owners have for the property. If it is an owner occupied property and the owners have no plans to move in the near future, then a period in keeping with their future plans would be reasonable.
Investment Properties
As far as interests rates for loans on investment properties are concerned, however, many investors opt for fixed rates. The reasons behind this decision can be, among others:
- Knowing the repayments will not change during the chosen period
- Interest paid can be tax deductible and knowing the amount in advance makes budgeting easier
- No plans to sell or otherwise dispose of the property within the time period
Therefore, carefully analysing personal and individual situations as well as looking into market trends can take the gamble out of making the decision to stay with the Variable Rate or Fix the rate for a specific period. An independent mortgage professional can also assist with the decision making process.
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