The lure of the fixed rate returns
Lenders are once again trying to lure borrowers to their fixed-rate loans by slashing rates – sometimes up to half a per cent lower than variable loans. And some borrowers are definitely taking notice of the low advertised rates.
Is it a good time to choose a fixed-rate loan? While every borrower is different and will have unique circumstances that determine the suitability of a fixed-rate loan, it pays to have a general understanding of what you get (and what you don’t get) when you choose one of these products.
It’s worth noting that although exit fees have now been abolished, borrowers will still face break costs should they exit a fixed-term loan to get a lower interest rate. These costs are designed to cover the lender for the money they are foregoing and could add up to tens of thousands of dollars depending on the situation.
Other drawbacks of fixed-rate loans worth considering are that they often have restrictions on making extra repayments and usually have no features such as offset accounts or redraw. When considering a fixed-rate loan you should also be clear on what happens after the fixed rate period expires, as some loans may revert to an uncompetitive variable rate.
If you are thinking about choosing a fixed-rate loan, you should talk at lengths with your broker about the pros and cons in relation to your own circumstance and perhaps consider fixing a portion of the loan or fixing for less than 3 years to minimise the risk. While we think the low rates make consideration of fixing your rates worth giving serious thought to, there’s more to consider than just the rate.