Fixed Versus Variable Interest Rates

One of the major choices to be made when choosing a home loan or a loan on a residential investment property is whether to take a variable interest rate or a fixed interest rate.

A fixed interest rate will not change during the fixed period. During the fixed period the borrower knows their repayments will remain the same.

A fixed rate loan also has its advantages if variable interest rates rise. When variable interest rates rise a borrower with a fixed interest rate is relatively better off because their rate will remain the same.

If interest rates should fall a borrower with a fixed interest rate is relatively worse off because they do not benefit from the fall in variable rates.

A variable home loan interest rate should move up and down with the market interest rates. The main cause of variable home loan interest rates is the cash rate set by the Reserve Bank of Australia. When the RBA alters the official cash rate, most variable home loan interest rates change by a comparable, if not the same amount.

Home loans with a variable interest rate usually have the highest repayment flexibility. The usual way is that the borrower can pay off their loan without penalty.

As previous statistics have shown, sticking with a variable interest rate is the best for consumers.

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Published on November 11-th, 2008 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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