What is a Fixed Interest Rate
Like the name says, a fixed interest rate is a loan where the interest rate stays the same. This rate will apply for a set term, usually between 1-5 years on a home loan. As shifts in the market won’t affect your interest rate, a fixed rate term provides you with security and stability at the cost of flexibility.
Pros of Fixed Interest Rates
– Easy to account for: As the interest rate doesn’t change, it is simple to budget for as the repayments remain the same. This is perfect for people who don’t want to think too much when it comes to budgeting.
– Stable Rate: If you think that interest rates will rise, or don’t like the uncertainty of the future market then a fixed interest rate plan is perfect for you. A fixed interest rate will provide you with the security needed to calm your nerves.
Cons of Fixed Interest Rates
– Less Flexibility: Normally variable interest rate products come with extra features that can help you when it comes to planning your repayments according to your budget. As fixed interest rate plans generally don’t have these features, you may need to decide whether you want to set your repayments in stone or not.
– Rate Change Benefits: If the current interest rate becomes favorable for you, nothing will happen. Variable interest rate products will allow you to repay less or save more if the market changes to benefit you, which is something to think about when choosing the type of interest rate you want to use.
– Early Payment Penalties: As a fixed interest rate product will want you to make the same repayments each time, trying to repay your loan earlier may not work in your favor. Perthbroker.com.au notes that some providers will even charge you a fee if you try this, so make sure you know all about your loan before locking yourself in.
How is a Fixed Interest Rate Determined
Your provider will offer you a set rate based on how they think the market will fluctuate. If the rates are currently low, they will most likely offer you something a little higher than what you could get with a variable rate. Similarly, if the current variable rates are high then you will probably be offered something slightly lower to encourage you to lock that rate in before it drops substantially.
The End of Your Fixed Rate Term
You may be wondering what happens at the end of your fixed interest rate term, and the choice is up to you. You can choose to continue with another fixed interest rate, or opt to swap to a variable interest rate if you decide you would like the flexibility and extra features on offer.
An important thing to remember if you decide to stick with a fixed interest rate is that the actual rate being offered will be different when compared to your previous term, so make sure you are still getting a competitive rate before locking in again.