Fixed Interest Rates

Sat 4th, Apr 2020 @ 02:06am

Fixing the interest rate on your loans can provide certainty for your cash flow.

It does bring some limitations, so it should be a considered part of your debt management strategy.

In Australia, you can generally fix for periods of 1,2,3,4 or 5 years with most credit providers. Some will also allow periods of 7,10 or even 15 years! The most popular fixed terms are 1-5 years, with 2 & 3 year rates often the most competitively priced as is the case at present.

Limitations

For mortgages, generally when having a fixed rate you cannot have an 100% offset account linked. You can make extra repayments but it is limited during a fixed term.  You usually cannot have access to redraw on a fixed rate mortgage.

To combat the issues with flexibility many borrowers will leave a part of their loan as a variable interest rate loan. Most Business Loans and Mortgages will allow you to operate with multiple loan splits.

Make sure you get advice and understand your longer term plan and objectives. Fixing the interest rate may or may not be a part of yor strategy.  The biggest danger is you are locked into a loan contract for the fixed period. If you want to payout the loan, you may incur economic break costs (the banks loss if it has to reinvest the funds borrowed) and these penalties can be substantial.

So to fix or not?

Well, the statistics tell us that the borrower loses most of the time (more than 80%). This is generally because borrowers move too early or more more often too late in the rate changing cycle.

The best guide is the money markets are they are based on market forces and there is a lag between these interest rate changes and the funding cost of financial institutions. Whilst these are trending south like at present, this is not likely to flow through into higher interest rates.

For any support for these types of decisions and options please contact us.