When purchasing a property or doing a refinance, you need to decide between a fixed-rate loan that maintains the same interest rate over a specific period of time or a variable-rate loan that charges interest rate according to market fluctuations. Each of the options has advantages and disadvantages.
A fixed rate loan usually comes with a few advantages:
- Budgeting – you know the exact repayment amount during the term of the loan so that you can plan ahead and set your financial goals with confidence.
- Interest rate rises – if the interest rate rises above your fixed rate, you will be better off paying less interest rate than the variable rate.
Some of the disadvantages are:
- Interest rate drops –you won’t benefit from a drop in interest rates if you fixed rate is more than a variable rate.
- Extra repayment – you will normally lose the flexibility due to limited extra payments.
- Exit/Break fees—you may encounter a hefty break fee if you change or pay off your loan within the fixed rate period.
- Redraw or offset facility – a redraw and offset facility may not be offered.
The advantage of a variable rate loan may include:
- Extra repayment – you normally make extra repayments at no extra cost, which may help you pay off your loan sooner and save you interest payments.
- Redraw or offset facility –you often have attractive features.
- Switch loans—you may switch to different loan product at a cheaper cost if you find a better deal.
The disadvantage of a variable rate loan may include:
- Budgeting—it can be difficult in terms of budget, as the interest rate can fluctuate over time.
- Mortgage stress—if you aren’t prepared for a rate rise, you may have a trouble of meeting the repayment increase.
Is there another option?
The Split loan is the answer. You can make a bet both ways by having a partial fixed and partial variable interest loans. There is generally no limit on the ratio of the split of the loan.
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