Which loan type—one with variable rates or one with fixed rates—should I choose?
Many of our clients who are looking to take out a loan ask this question frequently.
The optimal decision for you will rely on a variety of internal and external variables.
In general, personal factors are those over which we have complete control.
Personal factors could consist of:
- Life stage, including whether you are single, married, expecting a baby, or planning to retire,
- Loan’s intended use; personal versus corporate and/or investment loans; and
- predicting personal changes, including employment, income, or possibly an inheritance.
The ones that are outside of your control are usually external ones.
External factors could consist of:
- the economy; a change in governmental legislation or policy; and
- For instance, rising interest rates and cash rates
- Banks and lenders are altering their lending criteria.
Since both internal and external forces are extremely dynamic, it takes someone with excellent foresight—a skill that we all wish we had—to know how to achieve the greatest outcome possible that will endure the duration of the loan.
We can only choose what, in the context of the always shifting environment in which we all live, seems to be the best course of action for us at the time. We must therefore consider the benefits and drawbacks of each alternative.
Please see the benefits and drawbacks of selecting a loan with either fixed or variable interest rates stated below.
| Fixed Rates | Variable Rates | |
| Advantage | comfort in knowing your monthly budgetThe same amount will be repaid.for a set duration. In a market with rising interest rates,Your charges will continue to be set, andtherefore less expensive than variable rates. | typically more adaptable thanfixed-rate loans For instance, thecapacity to make additional principal paymentsor perhaps redraw any funds.paid up front. Variable loans could provide additional benefits.characteristics, some of which may beattractive in your circumstances. TheOptions will change depending on thebanks. |
| Disadvantage | Institutions of finance could imposepenalties for switching plans too soonmoving from a fixed to a variable loan. Several fixed loans and financialOrganizations may impose fees on anyadditional payments you want tomake. Please verify withthe bank. | Repayments are determined by thevariable rate of interest. Becausesince if interest rates increase, thethe bare minimum monthly paymentmost certainly increase as well. |
Divided Loans
Many of our clients have also used a third choice that combines the best of both worlds: split loans.
As an illustration, Mr. and Mrs. Howard choose to invest in a business property and need a loan of $500,000. With a $250,000 fixed rate and a $250,000 variable rate, the $500,000 loan can be split 50/50. Although the borrower in this instance is still vulnerable to interest rate fluctuations, only the repayments on the $250,000 variable portion of the loan will be affected. Additionally, if it suited them, they might use this to make additional payments on the variable loan.
How can you choose wisely now that you’ve seen the benefits and drawbacks of both fixed and variable loans and are aware that it’s possible to split a potential loan? It’s crucial to be sure the choice you select is right for you and advantageous to your financial and personal circumstances.
Consult an Expert
Our suggestion is to consult the professionals, those who are familiar with all aspects of dealing with different financial institutions on a regular basis. A loan broker will be able to sit down with you and talk about your unique situation and your needs—both now and in the future—before speaking with the financial institutions on your behalf. A loan broker often receives payment from the banks only when they bring forward a deal, so you, the client, are not charged for this service.
- The following will be taken into account and examined for you by a great loan broker: –
- What are today’s top variable rates available?
- What are today’s top fixed rates available?
- How these individual rates will change
While having such a conversation with a broker would undoubtedly occupy some of your day, it will also help you decide what is best for your particular circumstances.
Every day, our clients employ loan brokers. To have someone fit for your circumstance recommended, please contact us right away.
This summary should help you decide whether fixed or variable rates would be better for you and your circumstances.