Are fixed loans really a safety net or will it become a hostage situation?
Are fixed loans really a safety net or do they take you hostage?
Do you buy your movie tickets before you leave the house? Do you like to book a table at a restaurant to make sure you don’t miss out?
There is a certain comfort in knowing what’s going to happen, especially when it comes to planning your financial future.
If you worry about the ups and downs of the official Reserve Bank rate, and the possibility of your home loan repayments increasing without warning, a fixed rate loan could be your new best friend.
Fixed interest rates are a kind of insurance policy that protects you against the financial pressure caused by interest rate movements. Depending on your personal situation, you might struggle to meet your repayments if interest rates were to rapidly increase. If you opt for a variable interest rate, you have no control over fluctuations in the market.
Ideally, you should have allowed for a few rate rises when deciding how much to borrow. But if you stretched your limit in order to buy your dream property, then fixing your interest rate is a great safety net.
Fixed rate loans allow you to be sure about your exact repayment figures for a fixed period of time. This is great for borrowers on a tight budget – because you never have to worry about interest rate fluctuations during the fixed period.
The purpose of a fixed rate loan is not to save you money on interest. Generally, these loans will cost you more in interest. Fixed rates are usually higher than variable rates, so the only way this approach will save you money is if there is a rapid fluctuation in interest rates, and the standard variable rate climbs significantly above your fixed rate.
A fixed rate could cost you money if interest rates fall. You will be locked into a higher rate when other people are enjoying a reprieve. You need to decide if you’re happy to take this chance and fix your rate for a period of time.
The biggest risk of going fixed is the penalties that you will incur if you need to get out of the loan. Many lenders charge enormous break fees for borrowers leaving during the fixed interest rate period. It’s also very difficult to change your loan during the fixed period, and generally, you can’t make any lump sum repayments.
If you have a variable rate loan, it’s a great idea to regularly review your needs every few months. You might decide that the time is right to fix your rate, depending on your circumstances, and the fixed interest rates on offer.
Beware of sitting on the fence. Many lenders promote the concept of 50/50 fixed and variable rate loans. Some borrowers see this as a no-risk alternative to choosing either fixed or variable rates. Keep in mind – if you choose to fix part of your loan and leave the other part variable, you will still be locked in because of the fixed portion of the loan.
If you want to see if a fixed rate suits your goals, contact Boss Money today.