DIFFERENCE BETWEEN FIXED AND VARIABLE LOANS
Fixed rate loans have an interest rate that is fixed for a specified time. At the expiration of the fixed period of time the borrower needs to apply for a further fixed term (or) switch to a standard variable rate. The main ADVANTAGE of fixing interest rates is that your repayments do not change in times of interest increases. The main DISADVANTAGE is that in times of decreasing interest rates there is no flow-on benefit, redraw facility and offset accounts may not be available and in times of continuous decrease in interest rates; it is costly to change to a lower interest rate loan as you would be required to pay a penalty based on the difference between the existing fixed rate of interest and the current interest rate.
Variable interest rates on the other hand, move with the changes to market interest rates. This means interest rates can rise or fall over the term of the loan. The main ADVANTAGES of variable interest rate loans is that interest rates decrease in times of market interest rate decreases, unlimited redraws; reducing the interest payments by setting up an offset account and the ability to pay off the loan faster without incurring interest rate break costs.
Another consideration is to take advantage of the benefits of fixed and variable loans by splitting the loan into fixed and variable. The percentage split should be determined in consultation with your accountant.
Finally, consideration should be given to fixed rates on long term loans in times of low interest rates, whereas first home-owners should consider splitting their home loan into fixed and variable so they can take advantage of the benefits of variable interest loans, such as offset account and unlimited redraws.
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