There’s been quite a bit of talk lately about whether now is a good time to fix your loan, as rates level off and the pundits continue to speculate where things may go from here.
And the answer lies with you. Because if you’re prepared for rates to stabilise or even drop over the next year even after you lock in a higher rate – you’re probably the sort of person (and personality) who is comfortable with taking that risk.
But if you’re living from hand to mouth each month and every rate announcement sends you into a hot sweat – you need to consider whether you would be better with a fixed rate that will give you more certainty around your payments, or indeed whether that hot sweat means you need to drastically revise your whole approach to managing your finances.
So before we put ourselves in one corner or another – let’s have a look at the pros and cons of both types of loans…..
Standard variable loans are historically most popular among borrowers as they generally mirror what’s happening to official interest rates. They also provide the most flexibility in relation to the range of features attached to the loan.
However, the rates on these loans can vary by as much as half a percent between many major lenders, so it’s wise to shop around. You should also check the comparison rate on the loan which gives you an adjusted annual percentage rate by calculating the true cost of the loan when compulsory fees are included.
Fixed loans on the other hand are popular with borrowers who want more certainty on their loan repayments – and for that reason tend to be more appealing in times of rising rates. The rates are generally set for a period of one, two, three or five years, with some lenders offering fixed loan rates beyond those periods
However with fixed loans, timing is everything – as all lenders predict ahead where rates will be over the term of the loan period. Rates therefore can vary substantially between loan providers. This is why taking out a fixed loan is often referred to as betting ‘against the market’.
You need to also be aware that fixed loans can still have some break fees associated with them which are specifically in place to deter borrowers from switching out of the fixed loan if they find they’ve locked into a rate too early – and want to change to another loan.
These fees are however now under closer scrutiny because of implications from the National Consumer Credit Protection Act, but nonetheless, it’s still worth reading the fine print.
So are there any other options? Yes. You can hedge your bets and fix only part of your loan, leaving the rest on a standard variable rate to give you the best of both worlds – and this arrangement is becoming increasingly popular.
And as for a final parting shot – whether you fix or stay with a standard variable loan, the buck really does stop with you.
So determine how you emotionally and financially react to changes in official interest rates – and then look at what sort of financial footing you need to confidently carry you forward
Tags: Comparison rate, Fixed Rate, variable rate