Astute East Brisbane's Finance Insights

Drawing on his industry experience, Tony Duncan shares his thoughts on industry changes, home loan requirements and a number of important areas to consider when planning your first home purchase or your next property investment. 

  • Tony Duncan

Fixed vs Variable Interest Rates: Which is right for you?

Updated: Aug 23

While the Reserve Bank has made strong indications to Australian’s that interest rates will not be raised until 2024, we’re starting to hear rumblings from the banks to indicate this could be different for fixed interest rates.


If you’re in the market for a home and mortgage, it’s essential to understand key market movements and what it means for your circumstances. The difference between fixed and variable interest rates could be thousands of dollars. At Astute, we want that amount to be well and truly in your favour.


Fixed or Variable interest rates Brisbane
Deciding between Fixed and variable can be a challenge.

As a result of the recession and as a way to stimulate spending in the Australian economy, the Reserve Bank has kept interest rates low. During the pandemic, the financial impacts on millions of Australians saw many banks follow suit and pass on those interest rate cuts to the end customer. They aren’t legally obligated to do this, and their views on the market appear to be changing. That said, the bond markets primarily drive the cost of fixed interest.

CBA Increase interest rates

The CBA recently announced an increase to its 3-year rate. Given it’s one of the first increases by a major bank, it’s perhaps signalling those further changes could be on the horizon.


According to Peter Switzer of Switzer Daily, “The problem is that the economy is rebounding strongly and the country’s banks have only $90 billion left in cheap credit provided by the RBA via what’s called the Term Funding Facility (TFF) to soften the blow of the Coronavirus. A strong economy and surging property prices mean there’s a big demand for loans, and without this cheap loan money, experts are warning that fixed interest rates will rise.”

In acknowledgement that this is a possible scenario, we’re taking a closer look at a Fixed Interest Rate vs a Variable interest rate. Because they each have different pros and cons, we thought it worth summarising the difference between Fixed and Variable interest rates.


Fixed interest rate brisbane

Fixed Interest Rate

This is essentially an agreement with the bank that you will pay a set interest for an agreed period. It can be a good time to consider a fixed rate if the market is low. However, as it’s an agreement, it can also come with strict terms which can be a challenge if your circumstances change.

Benefits

  • You will have a greater level of certainty over monthly repayments.

  • A Fixed Interest rate allows the setting of a more accurate budget.

  • If interest rates rise, a low fixed rate means repayments could be less than the variable market rate.

Downsides

  • You could be locked into the rate even if rates decrease.

  • You could be penalised for making additional payments.

  • A fixed interest rate could have expensive break fees for adjusting or selling your home within the mortgage term.

Brisbane river
The Brisbane river, Queensland

Variable Interest Rate

A variable interest rate allows you to pay a different interest on your loan based on what the banks set (often guided by the Reserve Bank). It’s often influenced, and changes based on the economic situation and comes with a much greater degree of flexibility should you decide to sell your home or pay your loan off sooner.

Benefits

Allows for increased repayments during the loan term

You’ll pay less if the interest rates are reduced

Could include a redraw facility/ offset account

Downsides

Provide less certainty of loan repayment costs

You’ll pay more if interest rates increase

The majority of Australian’s tend to opt for a variable interest rate when financing their homes due to the greater flexibility it provides. At Astute, we’ll consider the most suitable loan structure to meet your needs and offer easy-to-understand options to you. We could even split the loan.

Split loan brisbane

What is a Split Loan?

A split loan is a loan that allows you to utilise a portion of debt against a fixed interest rate and another portion against a variable interest rate. Most banks will offer a Split Loan option; however, not all lenders offer this across all their products.


We will always work with you on a case-by-case basis as no two financial situations are the same and should include careful consideration by a mortgage specialist.

Benefits

Flexibility over which portion of the loan to split

Security against a highly variable market

More features such as an offset account

Downsides

Complexity and cost as there could be additional fees

Less clarity over budgeting

Not all home loans can be split, so less home loan product to choose from


We hope this breakdown of fixed vs variable interest rates has been helpful to you. If you’d like more information, we invite you to reach out as we’re always happy to have a chat and understand your situation a little better. To learn more about the risks and benefits involved with each loan, please see our risk/benefit statements below. We’ll be glad to run the numbers and provide recommendations specific to your circumstances. Importantly, we’re there to help simplify the process for you.


Risk / Benefit Statement – Fixed Interest Rate loans

Risk / Benefit Statement – Variable Rate Loans


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General Advice Warning: This communication contains general information only and in no way constitutes the provision of professional advice, nor should it be relied on as a substitute for financial, credit, accounting, legal or other professional advice. We have not taken into account your financial situation, investment objectives or particular needs. Before making an investment or financial decision, a person must seek appropriate independent professional advice and also consider whether this information is appropriate to their needs, objectives and circumstances. The author as well as their representatives, agents and employees give no guarantees and make no representations, express or implied, as to the accuracy, currency, completeness or suitability of the information contained in this document. Nor do they accept any liability whatsoever as a result of any information herein being incorrect, incomplete or unsuitable or as a result of a person in any way using or relying on the information herein.

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