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Fixed Vs. Variable Rate Loans: The Pros And Cons When Buying A Property

When buying property, one of the more likely decisions you have to make is what type of loan to acquire. Getting a loan will help you meet the financial requirements to be able to purchase your dream property. That’s why it’s common for property buyers to apply for a loan to finance their investment.

When getting a loan, you will have many options, including whether to choose a fixed or variable-rate loan. Both loans are beneficial depending on your needs and capability. But before you start choosing between the two, it’s highly recommended to familiarize yourself with both options and learn their pros and cons.

Fixed Rate Loans

A fixed-rate loan has an interest that is unchangeable throughout the loan term. Whatever the interest rate you and the lender agreed on during the application process, it will stay the same until you pay the entire loan amount.

Understanding how fixed-rate loans work, you will instantly think it is the right option to help you finance the property you like. But let’s discuss the pros and cons of this type of loan first before jumping to the conclusion.

The Pros

• It allows you to predict your monthly repayment amount until the end of the loan term, making it easier to budget your money.

• Fixed interest rates won’t be affected by any market changes, including the fluctuation of interest rates.

• You can choose a suitable loan timeframe, ranging from 6 months to 10 years.

The Cons

• Since the interest rate is fixed, you can’t benefit from a period where interest rates suddenly drop. As a result, you’ll continue paying a high interest rate despite the fall.

• It is known that fixed-rate loans often cost more over time than variable-rate loans.

• Changing loan terms and exiting the loan early will incur additional charges under fixed-rate loans. As a result, you’ll be stuck with repaying your loan throughout the agreed-upon time.

Variable Rate Loans

In contrast to the fixed rate loan, a variable rate loan is a loan agreement where the interest rate could change according to the adjustment of the standard interest rate. For instance, the interest rate of the CreditNinja variable rate loans you acquired is expected to change according to the rate paid to specific US Treasury securities. A variable rate loan can be any loan type, from personal to installment loans.

Hence, the same goes for loans involved in financing a property. Let’s review the pros and cons of getting a variable-rate loan.

The Pros

• The loan interest rate will decrease if the interest rate falls.

• Variable-rate loans have better upfront benefits, such as low introductory rates for an initial loan period.

• Enjoy lower interest rates than fixed-rate loans, especially if your loan is incurred.

• You’ll get access to more features like offset accounts and redraw.

• With variable-rate loans, you can easily refinance to a more competitive loan without paying high break fees.

The Cons

• Since variable interest changes according to the market, expect your loan’s interest rate to increase once the standard interest rate rises. As a result, it will affect your budget and can strain your finances.

• You can’t plan your monthly repayment or set a budget since you won’t know how much you’ll pay in the coming months.

Can’t Decide? Consider A Split Loan

Depending on your circumstances, variable and fixed-rate loans can be a great option in financing your property acquisition. However, if you are still torn between the two loan types, you might consider taking a split loan instead. A split loan gives you the best of both worlds.

Therefore, if you apply for a split loan, you can split your loan into smaller portions. Most borrowers split their loans into a variable rate loan and a fixed rate loan. Some opt to split their loan for a multiple variable or fixed.

With this option, you can plan your loan in a way that works best for you. For instance, you might want to make the first part of your loan into a fixed-rate loan to have more control over the first half of the loan term.

You can then make the other part of your loan as a variable rate loan to experience the benefits of a variable rate, like a potential interest rate decrease as the standard interest rate in the market falls. In addition, changing to a variable rate loan at the second part of your loan term will allow you to refinance to a better loan offer without paying a break fee.

Moreover, you must consider other possible expenses you expect in the coming months, given that you have acquired a new property. For example, are you planning to renovate the house on the property? Or, if the property doesn’t have a structure, are you planning to build one soon?

Consider these types of expenses before you decide what approach to follow when splitting your loan.

Bottomline

When taking a loan, it’s not enough to know whether you can afford the repayment cost or not. It’s also crucial to strategize so that you can enjoy as many benefits as you can. Keep in mind that as long as you are knowledgeable, you can easily plan the strategy for acquiring a loan to finance your dream property.