Variable or Fixed Rate Loans
In the choice of lenders and the loan products Awesome may indicate a preference for either a variable interest rate or a fixed rate as the most appropriate loan product for you.
There are a few keys advantages and disadvantages of both of the loan types. As part of our commitment to educating our clients to ensure they are able to make informed choices we have prepared the following comparison.
Fixed Rates:
With fixed interest rate loans, the interest rate is set for a specific period. At the end of that time, the loan reverts to a variable rate or you can renegotiate a further fixed term. By locking in your home loan, you are protected against rising interest rates. And your monthly repayments remain the same throughout the fixed-interest period.
Advantage: By locking in your home loan, you are protected yourself against rising interest rates. And your monthly repayments remain the same throughout the fixed-interest period.
Disadvantage: fixed loans have fewer features than variable loans, are expensive to break and can attract a slightly higher interest rate.
Fixed Rate Break fees :
These are charges are designed to cover any loss the lender may incur as a result of you repaying any amount (including after a default) before the end of a fixed rate period. Each lender has its own formula calculating break fees.
For example, if interest rates have fallen since your fixed rate period began, when you repay the lender they will only be able to re-lend any money at the lower current interest rates. As a result if you fixed rate is higher than the variable rate the lender will seek to recover the difference over the remaining term of the fixed rate period.
Rate Lock:
The other thing to consider with fixed rates is the opportunity to lock the fixed interest rate as at the date the loan is approved. This is particularly good feature to take advantage of if you think interest rate might rise before the loan settles. There are fee attached to this option so please feel free to discuss this with us.
Variable Rates:
A variable interest rate loan is generally tied to the interest rates controlled by the Reserve Bank of Australia. The reserve Bank adjusts rates to reflect the prevailing economic conditions. Due to the short term nature of the interest rates offer there is more competition and as result the rates are generally more competitive.
Advantage: the advantage is you can make additional loan repayments without penalty. If rates rise generally so do rental yields.
Disadvantage: Less certainty means that lenders are more stringent in testing your ability to afford the loan leading to a reduced borrowing capacity. Rate can vary dramatically and it can take time for the rental market to adjust.
Like to discuss which is right for you? Please feel free to call us for an obligation free quote