FIXED or VARIABLE INTEREST RATES – WHAT IS BEST?

We are often asked if it is a good time to fix interest rates. 

However, the answer to this is different for everyone depending on their financial position, so make sure you discuss your options with a Byfields Finance expert before making any decisions.

Please find below some general information to help you understand the differences between Variable and Fixed rates and what may work best for you.

VARIABLE RATE LOANS

Variable interest rate loans are all about flexibility. A variable rate will move up or down as the market moves.  There are a few reasons people like Variable rate loans:

  • You can make lump sum payments and increased regular repayments without penalty to pay off your loan sooner.
  • Some variable rate loans come with Offset features.  Allowing any cash held in your bank account to reduce the interest charged to you monthly.  This will also save a lot of money over the life of the loan.
  • Having a variable rate also means you can change banks for a better deal without penalty.  Most people like to have the flexibility to move if they feel they’re not getting the best deal or the service they expect.

FIXED RATE LOANS

A fixed rate loan is one where the interest rate is fixed for a set period, usually two or three years but can be up to 10 years.  Fixed interest rates are immune from any increase (as well as decrease) to the official variable interest rate. 

The reasons some people like Fixed rates are:

  • They are great for borrowers on strict budgets, as they have a known and stable repayment for a set period.  No surprises.
  • If interest rates are not expected to go lower, or may even increase in the future, then it would be a good idea to lock in a rate before they may rise.

However, there are risks to be aware of if considering Fixed rates:

  • In the event variable interest rates drop, you may be locked into a higher rate
  • You cannot make any lump sum reductions to your loan.  Nor can you make any regular additional payments to pay off your loan sooner, as significant penalty’s may apply.
  • If you need to break the fixed rate term because you have sold the property or want to change banks, you should note there is usually significant break costs to switch bank to a variable rate.  You should not fix your rate if you expect to sell in that period.
  • You are unable to have features like Offset accounts attached to a Fixed rate loans.

SPLIT RATE LOANS – A FOOT IN EACH CAMP

A split rate loan is when you separate your mortgage into two loans – one with a fixed rate and one with a variable rate.

It’s something of an ‘each-way bet’. A split loan offers borrowers protection from rate rises (with the fixed portion of the loan) alongside the advantage of being able to use features like Offset on the variable, so that cash savings can be used to reduce the interest charged.

Most banks will allow you to split your loans without having to pay for two separate loan applications or additional ongoing fees.

Choosing the right structure for your loan depends on your personal situation, earning capacity and long-term goals for your property.  Speaking with your Byfields Finance Solutions expert can help you confirm what is the best option for you.

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