Variable Interest Rate – Are you sure this is the right choice for you?

Variable Interest Rate – Are you sure this is the right choice for you?

With so many different loans on the market, it’s easy to get a little confused. It’s not always simple to work out which lender is offering the best deal, or who has the best interest rate.

One of the main choices you need to make early on, is whether to opt for a standard variable interest rate, or a fixed rate loan.

Many lenders offer fixed rate loans for 1 to 3 years, some even offer periods of up to 10 years without a change to your interest rate. So with all of this certainty on offer, what are the benefits of the old-fashioned variable interest rate?

Lower interest rate

Usually your rate will be lower than a fixed rate mortgage, meaning that you pay less interest. Variable rates are generally lower than fixed rates. If you choose to fix your rate, you’re paying for the certainty that this offers.

Take advantage of decreasing cash rate

If your lender reduces their standard variable interest rate, your interest will be reduced accordingly, meaning that you always pay the lowest standard rate that your lender is offering. So when the Reserve Bank lowers the official cash rate, there is a good chance that your repayments will reduce.

Features and Flexibility

Usually standard variable rate loans offer an array of features that you don’t get with a fixed rate loan.

Most variable rate loans give you the flexibility to make additional payments when you want to, but then redraw the extra money again later if your situation changes.

Many lenders also allow offset accounts for your savings which reduce the overall interest charged on your loan – because the bank takes your savings into account before calculating your interest.

When you opt for a variable rate loan, you always have the flexibility to fix your rate later, meaning that you can wait and see if rates are further reduced, potentially saving you money. If you have already fixed your rate, you will continue to pay the same interest rate even when the official cash rate continues to decrease.

On the other hand though, if the official cash rate rises, your loan repayments will increase accordingly. Did you make the mistake of borrowing too much? If you opt for a variable rate loan, and then interest rates start to rise, you might find that you struggle to meet your repayments.

To avoid issues in the future, it’s really important that you take the time to compare the loans available to you, and choose the loan that suits your lifestyle and budget.

Posted in Buyers Advice on Monday 11th April, 2016