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  1. Variable loans versus fixed loans

Variable loans vs fixed loans

Whether you’re new to home loans, investment loans or personal loans, or you have been in the market for a while, one of the big questions is whether to choose a variable or fixed interest rate.

Variable or fixed interest rate? It’s a big decision that might impact your finances over the coming years.

While there isn’t one answer that will suit everyone or every circumstance, there are several things you can consider to make the decision that best suits you.

Variable rates: Pros and cons

A variable interest rate brings with it flexibility and as the name suggests variability, which makes it a choice worth considering carefully before committing to a loan.

Variable rates move according to the market. They can rise and fall many times over the period of a loan. Obviously this is a great feature if rates are dropping, and many people choose to continue paying the same amount even after a rate drops so that they can pay off their loan sooner.

This option to make extra repayments is one of the key attractions of a variable loan. There are no costs associated with paying extra, and it can mean paying off your loan sooner and saving money on interest.

When considering a variable home loan rate, it’s also worth noting that these products often offer additional features such as a redraw facility and the ability to establish an offset account. Other features may include the option to take a repayment holiday if you qualify, and it’s usually easier to switch loans because you aren’t locked in.

However, variable loans can impact your budget during a period of interest rate rises. They are unpredictable and it can be difficult for some people to cater for uncertainty in what their repayments will be at various times during the loan’s life.

Some home loans offer a split between variable and fixed rates, which some find to be a good compromise in creating a loan that’s right for their budget.

Fixed rates: The good and not-so-good

A loan with a fixed rate can be perfect for some people depending on their circumstances, while it can be a choice to avoid for others.

Perhaps the best thing about a fixed rate is that your loan repayments are always predictable. This can make budgeting and planning your finances easier, with the same repayment amount every week, fortnight or month for the period of your fixed rate term.

If it’s a personal loan, it will usually be fixed for the duration of the loan, while fixed rate home loans offer a set fixed period (usually one, three or five years), at which point you can choose to revert to variable interest rate or discuss a new fixed term arrangement.

It can also be comforting to know that you’ve locked in a rate so that if interest rates rise, your payments won’t increase.

However, fixed rates also come with a lack of flexibility; they may not allow extra payments to be made, and paying a loan off early can incur a sizeable fee. Fixed rate home loans also may not come with a redraw facility.

There is also the risk that interest rates could drop, making your fixed rate higher than the market variable rate.

Helpful definitions:

Interest rate - An interest rate determines the amount of interest that you will pay over the life of your loan.

Variable rate - A variable interest rate will rise and fall depending on what the market is doing and the rate set by your bank. A fixed interest rate is set at a rate and does not vary for the fixed rate term.

Split loan - If you don’t want to commit to a variable rate but don’t want to fix the rate on your whole loan, you can split your loan, so that some of it is on a variable rate and some is on a fixed rate. This is called a split loan.

Check out Australian Unity’s range of competitive fixed and variable interest rates on personal loans, home loans and investment loans or discuss your personal circumstances with a lending specialist

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