June 08, 2015
With Interest rates at all time lows, and several lenders offering very attractive fixed rates, many of my clients are asking whether they should go fixed or variable. I thought I would provide my thoughts on the subject.
Many of my clients believe that because I have so many years experience in the finance industry, I must know what is going to happen to interest rates. Realistically no one knows for absolute certainty what is going to happen with interest rates. As far I am concerned it is easier to pick red or balck on the roulette tables. I believe it is 50/50 whether rates will be higher or lower in a years time, so it really is a gamble.
The main reason to go fixed is for security. At least you know what your repayments will be for the period that you fix the rate. This makes it easier to calculate a budget because you know the repayments are not going to change. If you can only afford your current repayments and it would place stress on your budget if your repayments were to increase then a fixed interest rate is a very good idea. The main reason to go variable is that if you can afford to pay additional repayments now, you should be and this way if interest rates were to increase you have built in a buffer on the loan. Also if you know in the future that you will be receiving a large sum of money and you plan to deposit it into your loan, you are able to with a variable interest rate.
Something to consider about going with a fixed rate is the usual limitations that come with a fixed interest rate. Most lenders have restrictions on paying off the loan faster without possibly large penalties. Some lenders will allow you to pay a small amount of additional repayments but most do not allow you to redraw the extra funds you have put into the loan during the fixed rate period. So if you intend attacking the loan and to pay it off quickly, a fixed rate may not be suitable. You can get past this by splitting your loan into part fixed and part variable and paying the variable portion quicker. Most lenders also do not allow you to have an offset facility with a fixed rate loan.
I am more than happy to discuss this with you and also what the various lenders policies are on fixed rate loans. Please call me on 0497 612 231 if you have any questions or wish to discuss.