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Fixed or variable? It’s a question that’s frequently asked when it comes to choosing a loan interest rate. But what’s the difference between fixed and variable rates? And which is the best rate to choose? This is what we’ll look at in this blog post.
Fixed vs Variable Rates
Fixed Rates
A fixed rate is an interest rate that doesn’t alter; it remains constant over a specific duration of time. It provides consistency and predictability with loan repayments, knowing that you will be paying the same amount each time over the loan term. Any changes in the market or cash rates won’t adjust the loan interest rate.
Fixed rates are helpful when it comes to budgeting. You are able to budget for consistent repayments, with the peace of mind that interest rate rises won’t affect your loan. This can be especially beneficial when there are times of economic uncertainty. On the flip side, however, fixed rates can incur some fees and restrictions like break fees or capping. There is also the possibility of falling interest rates which means you unfortunately won’t benefit from the rate cuts.
Variable Rates
An interest rate that can change and vary over time is referred to as a variable rate. This rate is usually linked to a benchmark rate, such as the Reserve Bank of Australia’s official cash rate which is currently 4.10% as of 5 July 2023. Unlike fixed rates, when there are changes in market conditions or fluctuations in the benchmark rate, the variable rate is impacted. This can in turn either increase or decrease loan repayments.
Variable rates can offer flexibility, like paying off your loan quicker, and can give you the ability to refinance more easily – check out our blog on The Pros and Cons of Refinancing your Home Loan. Variable rates also mean that you can benefit from the interest rate cuts, but then can also be impacted should the rates rise. This creates uncertainty around loan repayments, making tasks like budgeting quite challenging.
Which Rate to Choose?
It’s important to carefully consider which interest rate is best for you. To do so, you can start by asking yourself these questions:
Do I understand the difference between fixed and variable rates?
What are my personal needs and financial goals?
What does the current market situation / economy look like?
What are the pros and cons of these interest rates, and how will these affect me personally?
At Biz Loan Connexion, we take the time to listen and understand your requirements and objectives. Being an accredited broker with an extensive panel of lenders, means we can often access more favourable interest rates and fees than are available to customers directly. Contact us if you’d like to learn more. You can also check out the Australian Finance Group ‘Fixed vs Variable – A Quick Guide’ flyer:
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