Lenders allow borrowers to either choose fixed or variable interest rates.
Variable interest is when the interest rate changes by the Reserve Bank or the lenders impact the interest payable. Increase in variable rates increases the rates payable and a decrease in interest rate, decreases the interest rate.
Fixed rates is when you choose a particular rate at a given time and the rate is locked in for a given period for instance 1 year, 2 years, 3 years and so on. When fixing rates during property purchase you may choose to pay what’s called a rate lock fee to lock in the rate. Any rate movements between the time you find the property go for formal will mean the fixed rate at settlement is applicable.
Pros – Variable Rates
- Flexibility to refinance or sell the property as you are not locked in with a given lender
- You can pay down the loan balance at the desired amounts
- You can utilise the offset account attached to the loan and therefore be charged interest on the balance of the loan. This can assist you in paying down the loan as quickly as possible
Cons – Variable Rates
- Rate movements – when upwards you will need to pay a higher rate. It can hurt the bank account in a markets where the rates are rising
Pros – Fixed Rates
- Surety of regular re-payments for a period of time
- Potential to lock in decent savings provided there are competitive fixed rates available
Cons – Fixed Rates
- Refinancing or selling the property may mean break costs will be encountered depending on the variable rate at the time. For instance if you fixed the rate at 4.5% and the current variable rates on offer are 4%, you will be required to pay break costs on 0.5% for the fixed rate period
- Difficult to time the market and exactly know where the rates will go – up or down and hence there is risk of fixing the rates at a high
- During the fixed period, there is no access to offset account with most lenders and you may not be able limited by being able to make a certain dollar value of additional repayments
If you have any questions or are uncertain about what break costs are speak with your bank or mortgage broker to determine the suitable approach for your goals, needs and circumstances.
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