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Should I choose a fixed or variable loan?

by Acceptance Finance

(Archived)
Monday, May 3rd 2010, 12:04 GMT+10:00
Australia

Even though interest rates have started to climb, we are still experiencing a market with historically low interest rates and given this, many clients regularly ask us if they should switch their variable rate loan to a fixed rate. We understand that every client’s situation is different. We can provide some clarity by discussing this with you if the need arises.

Mostly the questions are generated by the media hype surrounding rates, but it is important to remember at these times that it’s just that, “hype”. Bad news sells and the media is very quick to publicise concerns and focus on the negative.

Joe Terlato | Director

Media reports should all be taken with a grain of salt. Last time interest rates started moving up, the media predicted interest rates would get up to 15%. Many people at the time quickly fixed their interest rates and ended up being stuck at rates around the 8.25% mark. The problem is the rates only got as high as 8.75% and shortly thereafter reduced back to 5.25%. All those stuck still at 8.25% are no doubt wishing they had instead waited! 

That being said, there is still no guarantee as to what this rising interest rate market will do and while we may listen to the media, we should not take it as Gospel either. The moral of the story here is that the media, and in fact often even the “experts” get it wrong. So if you are trying to “beat the market”, we wish you luck! 

Our suggestion, if you are considering fixing the interest rate on your mortgage, is to think about a few of the following differences between a fixed and a variable interest rate loan:

Fixed:     

• Limitations on making extra repayments - usually limited to about $5,000 - $10,000 per annum
• No redraw facilities available
• Higher exit fees for early termination of the loan
• Rate fixed for between 1 – 5 years

Variable:

• Extra payments can be made to reduce your interest cost
• Redraw facilities are available
• No extra penalties above the standard ones for early termination of the loan
• Your payments can be adjusted to match the movements in interest rates

Keep these points in mind before deciding to fix your interest rate and at the end of the day make sure the loan features will suit you.

For more information about fixed versus variable rates, or to discuss your current or future home loan requirements, please contact our Finance Consultants on 03 9854 3500.

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