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Fixed Rate vs Variable Rate

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Fixed Rate vs Variable Rate

What is a fixed rate?

Fixed rate refers to the interest rate that remains constant within a certain period, usually 1-5 years. This means that within a fixed period, the interest rate of mortgage loans will not change with market changes, regardless of whether the RBA (Reserved Bank of Australia) announces a rate hike or a rate cut will not affect it. After the fixed period ends, the housing loan interest rate will automatically become the bank variable interest rate at that time.

Advantages of fixed rate

Predict of expenditures

You can clearly know the monthly repayment amount, which is convenient for borrowers to arrange the use of funds in the next few years, and even if banks raise interest rates, which will not affect their own home loan.

Interest rate lock-in

to reduce risk Interest rate does not adjust with changes in prices or other factors, and remains unchanged during the contract period.

Disadvantages of fixed rate

Unable to enjoy the benefits of interest rate cuts

Because the fixed interest rate fixes the cost of capital use, there is no need to worry about the impact of interest rate hikes, but when the interest rate drops, the borrower is locked in a higher interest rate level to pay more interest.

Unable to enjoy the benefits of interest rate cuts

Because the fixed interest rate fixes the cost of capital use, there is no need to worry about the impact of interest rate hikes, but when the interest rate drops, the borrower is locked in a higher interest rate level to pay more interest.

Unable to enjoy the benefits of interest rate cuts

Because the fixed interest rate fixes the cost of capital use, there is no need to worry about the impact of interest rate hikes, but when the interest rate drops, the borrower is locked in a higher interest rate level to pay more interest.

Unable to enjoy the benefits of interest rate cuts

Because the fixed interest rate fixes the cost of capital use, there is no need to worry about the impact of interest rate hikes, but when the interest rate drops, the borrower is locked in a higher interest rate level to pay more interest.

What is variable rate?

Variable Rate, as the name implies, refers to the interest rate adjusted according to changes in prices or other factors during the loan period. Due to changes in interest rates, the borrower’s monthly repayment amount will also change.

Advantages of variable rate

Repayment can be made in advance

Usually variable rate products allow the borrower to repay the loan in advance, repay the loan as soon as possible while reducing the interest cost, and without any other expenses.

More features
 

Variable interest rate products generally come with some attractive features, such as the redraw feature, or a more flexible offset account that can save interest.

Strong flexibility
 

For home loan products with variable interest rates, in the future, if you consider refinance or change to more favourable products, you can much easily terminate the contract and pay less termination fees.

Disadvantages of variable rate

Uncertainty in interest expense and repayment amount

As variable interest rates are constantly changing, borrowers cannot clearly calculate monthly interest expenses and it is difficult to formulate financial expenditure plans.

Mortgage pressure

Borrowers have the opportunity to enjoy the benefits of lower interest rates, but also bear the risk of interest rate increases. Once the interest rate rises, it means that the borrower will have to pay more money, virtually increasing the financial pressure of the family.

Many people may still have difficulty deciding which interest rate product to choose after comparing the advantages and disadvantages of fixed rates and variable rates. Some people may want the stability of fixed rates and the flexibility of variable rates.

Another way is to pack the eggs in different baskets, that is, to choose a loan product that combines a part of a fixed rate with a part of a variable rate to balance the advantages and disadvantages. That is, the mortgage quota is allocated proportionally. For example, 70% as fixed rate and 30% as variable rate. This means that borrowers can enjoy the benefits of low interest rates and reduce the impact of rising interest rates.

However, it should be noted that when choosing a variable interest rate, it can be fixed at any time if necessary; but if fixed, it can only be converted to variable after the fixed period ends, otherwise a fine will be paid.

An example to illustrate

A couple bought an apartment of 800,000 yuan for their own use and wanted to borrow 600,000 yuan. When choosing loan products, they are hesitant to choose fixed or variable interest rates. Through calculation, two different loan products and the monthly repayment amount required were analysed to help them make a choice.

Product 1

Variable interest rate, principal and interest repayment, interest rate 3.89%, monthly repayment amount is $2,827

Product 2

Fixed interest rate, principal and interest repayment, interest rate 3.79%, monthly repayment amount is $2,793

If you choose a fixed-rate product, you will save $34 per month, and the interest rate will not change with the market during a fixed period. In addition, the couple also considered the possibility of repayment in advance. Taking into account their own circumstances, there may be about $200,000 income for repayment in the next few years. After weighing them, they decided to fix two-thirds of the loan amount. The remaining one-third is variable. After that, they can still enjoy the stability of the fixed interest rate and the advantages of the variable interest rate. They can also repay the variable interest rate part in advance without paying too much.