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When you are searching for a new home or investment loan, you need to take into account the pros and cons of both fixed and variable interest rate contracts.
What are fixed and variable rates and what am I better off with when talking to a lender?
A fixed rate is when you lock in your loan for a specific term (generally one – five years) on the respective current fixed rate offered by your chosen lender.
No matter what happens in the market in terms of interest rates, your loan will not vary from the agreed rate in your contract. For example; you lock your loan in at 4.84% for two years – then eight months into your loan contract the variable rate spikes to 6%. In this case, your loan will remain at 4.84% for the rest of the two year term. Be aware that it also works the other way. If the variable dropped to 4%, your loan would remain on 4.84% until the end of the fixed term.
In most cases, at the end of the fixed term your interest rate automatically reverts to the variable rate that your lender is offering.
On the other hand, a variable rate will move as the lender moves its rates, whether this is up or down. Fixed rates offer certainty and security of repayments but with a variable rate you are left in the hands of the lender. There are a few concerns however with fixing your loan, the three main ones are;
- Flexibility – extra repayments are very limited with a fixed rate. This includes paying the loan out completely. If you sell your home and pay the loan out within the fixed rate term, you could be up for some hefty fees.
- Offset accounts – generally, you cannot offset a fixed rate. This means if you have available funds in a savings account, you cannot use them to save interest on your loan.
- Variable rates decreasing – you could find yourself locked in at a much higher rate if the variable drops during your fixed rate term.
If clients are considering a fixed rate, at Rising Tide Financial Services, we always recommend a combination of both fixed and variable. This eliminates or reduces some of the above possibilities involved with fixing your interest rate.
Call and speak to our lending specialist at Rising Tide for more information – 03 9600 2124.