Fixed versus variable

One of the key choices you may need to consider when deciding on a loan that is right for you is between a fixed and variable interest rate.

Certainly a good understanding of your financial position and goals will help you make the right choice between a fixed or variable product. Over the different stages of the life of your mortgage you may find one or more of the below options appropriate, influencing your choice of product.

Fixed rate products are for a set term, usually one to five years. The fixed rate generally reverts to a variable rate at the end of the fixed term or, depending on the terms of the loan, you may have scope to renegotiate a further fixed term at that point.

Fixed rate loan products provide certainty in your monthly payments, and in a time of rising variable interest rates can provide peace of mind. On the other hand if interest rates go down, you could end up in a situation where your fixed rate is higher than the variable rate.

"Knowing your financial position and goals will help you make the right choice", says Rob Emmett, Managing Director of Collins Securities. Fixed rated products generally have fewer features than variable rated - however every product is different and must be considered on its merits. Fixed rated products may also have penalties for early payout or additional repayments.

Variable rate products are more suited to a borrower who is prepared for the up-and-down fluctuations in interest rate movements. Many variable rate products also offer flexibility in repaying the loan (ie they dont penalise the borrower for repaying the loan early).

And of course, the faster you are able to pay off your loan the cheaper it will be. Variable loans can also offer features such as redraw, offset, portability and split loan facilities.

Split rate loans can offer a combination of the two options where one portion of the loan is fixed and the other is at a variable rate. You will have certainty on repayments for the fixed portion while retaining flexibility on the rest. You are normally able to make extra repayments, or pay off the portion of the variable, without incurring penalties.