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November

2014

Fixed or variable interest rates?

Is it a good time to fix your mortgage rate? Although interest rates are at a historical all time low, it is still difficult to predict which way they will go next. Over the last year, experts have been divided in forecasting the next rate rise or fall. Even before the GFC the experts were wrong and I suppose many investors were kicking themselves with fixed rate loans when they saw the rates fall greatly over a short time period.

If you want a general idea of where interest rates are heading, you need look no further than the fixed rate loans of the major banks. Compare the 2, 5, and 7 year fixed rate loans and you will get a general sense of where the markets believe the interest rates are heading. It is also good to remember that fixed rates are also constantly changing and are of course subject to many variables, not the least of which is where our economy is heading as well as the world markets and economies.

Of course there are always pros and cons with any type of loan. Some advantages of a fixed rate loan are

  • The rate stays the same so the payments stay the same
  • This in turn creates emotional security for the lenders
  • It is also easier to make a budget and manage your cash flow
  • If interest rates rise, you have had a win against the banks forecasting!

Some of the disadvantages are as follows

  • You receive no benefits from interest rate falls
  • If you wish to pay out the loan early, it can be costly with exit fees
  • These loans are far less flexible and one should carefully check the fine print to see what conditions are attached to the loan.

One final thought, if you take out a fixed rate loan because you think you can beat the banks at their forecasting, good luck. It would be more sensible if you look at the advantages of such a loan, one of which gives you budget certainty. Another option of course is to split a loan so that half or a portion is fixed and the other part is variable.

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