Fixed Interest Rates. The Pros & the Cons
Fixed interest rates - we’ve heard a lot about them lately in the media. Below we outline exactly what a fixed interest rate is, the pros and cons of fixing and a few things to remember.
A fixed rate loan allows you to set your interest rate for a certain period, normally of one, two, three or five year terms.
What this means, is that the interest rate won’t change during the period, no matter what the Reserve Bank of Australia does with interest rates. And that then means the repayments won’t change either, for that period.
In comparison, a variable interest rate can change at any point in time - up or down, at whim of your bank.
But there are some Pros and Cons to fixing your interest rate (also known as locking in), so here’s a few for you to consider, if you are thinking about fixing:
The Pros
Repayment certainty - You know exactly how much your repayments will be during your fixed rate term, which can make budgeting easier.
Protect against rate rises - If you think interest rates will rise, you can protect against them, by locking your rate in for a period. Sometimes the fixed rate can be a bit higher than the variable rate at the start, but you can benefit if the variable rate rises above the fixed rate during the period.
Work them to your advantage - During times of low interest rates, fixing your loan can work in your favour, because you can retain a low rate for a fixed term even if (or when) the rates rise steeply.
The Cons
Less Flexibility - Fixed rate loans usually don’t have the same flexibility that a variable rate loan provides. For example, you may not be able to make extra repayments and redraw them. Some lenders do allow extra repayments, but might restrict the amount that can be paid during the fixed term or on an annual basis.
No offset facilities - Most lenders won’t allow you to have an offset account with a fixed rate loan so there is no opportunity to save on interest. Where offset facilities are available, they will usually only be available on a partial basis.
Break costs - You can expect to pay significant penalties if you want to exit before the end of the fixed term. Your reason for wanting to end the loan is not considered, and break costs also apply if you want to end the loan as part of selling the property.
There are a few things to remember with a fixed rate too:
Fixed rate home loans often have higher interest rates than variable rate home loans. The longer the fixed rate term, the higher the interest rate is likely to be. For example, a five-year fixed loan will usually have a higher rate than a three-year fixed loan.
If variable rates go up, you may pay more interest than if you fix your rate. It will depend on the size of the increase(s), how far into the term the increase(s) occur, and how long you hold the loan after the increase(s) occurs.
If variable rates don’t change or go down, you will pay less interest than if you fix your rate. This is on the basis that your fixed rate is higher than the variable rate over the same period.
Yo, there’s a Disclaimer!
The information provided here is not legal, taxation or financial planning advice. It has been prepared without considering your specific needs, objectives and personal financial situation. Before acting on this information, we recommend that you consider carefully if it is appropriate for your needs, objectives and personal financial situation.
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