DIFFERENCE BETWEEN FIXED & VARIABLE INTEREST RATES
Choosing between a fixed and variable interest rate can be a crucial decision when taking out a mortgage. This week we outline the differences to help you make an informed choice:
Fixed Interest Rates
With a fixed interest rate, your mortgage rate remains constant for a set period, usually between one and five years. This means your monthly repayments are predictable, providing stability and protection against interest rate fluctuations. Fixed rates can be beneficial if you value consistent budgeting and want to avoid surprises in your repayments.
Pros of Fixed Rates
Stability: Your payments remain the same, making budgeting easier.
Protection: You’re shielded from rate increases during the fixed term.
Cons of Fixed Rates
Less Flexibility**: Fixed-rate loans may have penalties for early repayment or additional fees for extra repayments.
Potentially Higher Rates: Fixed rates can sometimes be higher than variable rates, particularly if market rates fall.
Variable Interest Rates
Variable interest rates fluctuate with market conditions. This means your mortgage rate can go up or down depending on changes in the official cash rate or lender’s internal rates. Variable rates often start lower than fixed rates, but your repayments can vary as rates change.
Pros of Variable Rates
Lower Initial Rates: Typically, variable rates start lower than fixed rates.
Flexibility: You can often make extra repayments or pay off your loan early without penalties.
Cons of Variable Rates
Payment Variability: Your repayments can increase if interest rates rise, which may affect your budget.
Uncertainty: You’re exposed to market fluctuations, which can lead to financial unpredictability.
Which is Better for You?
Choosing between fixed and variable rates depends on your financial situation and preferences. If you value stability and predictability, a fixed rate might be more suitable. On the other hand, if you’re comfortable with some level of risk and want to take advantage of potential rate drops, a variable rate could be advantageous.
Consider your financial goals, risk tolerance, and market conditions when making your decision.
