Fixed Interest Rates – The Pros and Cons
Interest rates are again at all time lows, so now may be the time to take advantage of some fantastic offers on Fixed Interest Rates. Before you do though, there are several ins and outs to know about ‘What is a fixed rate’ before committing.
Most lenders will normally allow you to fix your interest rate for a specific period. This is usually up to 5 years, with either 2 or 3 years being the most favoured.
What are the restrictions?
Fixed Interest Rates normally come with restriction as to what you can and can’t do. One is generally you are not allowed to make large lump sums or significant extra deposits to fixed rate loans. Most lenders will allow between $5,000- or $10,000- per year, with each lender having their own limits. If you repay more than the lender allows, they may charge you what is known as a “Break Cost” for paying off too much. This “Break Cost” may also be invoked if you repay the loan completely, earlier than your contract allows.
Another restriction is that if you have paid some extra off your loan and need to get access to those funds via “redraw”. Most lenders won’t allow this while the loan is fixed.
Another pit fall of taking a fixed interest rate loan is if interest rates fall. No one has a crystal ball to predict what will happen in the future. Even the best modelling can be wrong. Therefore, if you take a fixed rate and interest rates fall, you may be stuck on a higher fixed rate. Trying to get out of a fixed rate in this scenario may mean paying a break cost. This may negate any savings you could make by opting out of your fixed rate.
What are the Pros?
There are several pros to consider though. Chief among them is if interest rates rise. If this happens, your rate will be locked in for the period you have chosen.
Another is you know what your repayment will be for a set period, which allows for better budgeting. This could be important for first time buyers who want to know exactly where they stand in their first few years of home ownership or for investors wanting to know exact repayments so they can budget how much of their own cash they need to use.
One option you may look at taking is a split loan. This is where you take part of your loan on a fixed interest rate, but still have some on a variable interest rate. This allows you some certainty, but still allows flexibility if you want it. A split loan is actually taking two separate loans, so there may be extra fees charged by the bank to take this option.
Dennis Smallwood can help provide you with options on interest rates and what will suit you, however at the end of the day, it is your needs and wants, and your own choice as to which style of loan to take.
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