Fix Your Debt, Fix Your Future
Deciding to fix your interest rate can be a difficult decision but Troy Green from Adgreen explains why you have to decide on whether it’s essential you lock down your outgoings or opt to play in the rate space.
Fixing interest rates is a fairly common concept, especially in today’s market, but what does it really mean?
This is the rate at which the bank offers to fix your loan and it is influenced by many market factors. These current economic and business factors are scrutinised by industry experts, who then try to predict where interest rates will go over a specific period of time.
They calculate what this translates to in terms of an average rate for the period, also allowing for inflation. This is the interest rate the market trades at. It also represents the rate that the banks can obtain the funds you need to borrow at a fixed rate.
The bank adds a margin for profit and a margin of error and arrives at the rate they are willing to offer you. There is strong competition between the banks for your loan and this generally keeps their margin for profit fairly tight.
Fixing your interest rate probably means you end up paying slightly more than if you stayed at variable rates but you have bought peace of mind and the ability to plan your cash flow.
Sometimes rates set by the market, and thus the banks, can actually work in your favour.
If you need to exit a fixed rate contract, you will incur costs. Each bank has a formula for evaluating the cost of breaking a fixed rate loan. Before breaking a fixed loan contract, it’s important to contact your bank and ask them exactly what the break cost will be.
In investment terms, fixing a loan is more an insurance or risk management strategy. Fixed rates will provide certainty for the period the loan is fixed but the rates will generally be higher, which you could consider as paying insurance for the reduced risk of higher rates.
Other measures to manage your risk include taking out insurance, particularly income protection, TDP and life insurance.
The main question to consider is probably whether you want stability and certainty, even if it potentially costs a little more, over risk management and flexibility,
at a lower cost.
Take a holistic view of your individual risk profile, other risk management strategies and financial circumstances.
Troy is happy to help you consider options so contact Adgreen today to discuss fixed vs variable interest rates in more detail.
Best owner occupied 3 year fixed rate with P.I repayments
3.69% (4.15% comp rate)