Should I lock in my interest rate?

I am often asked whether now is a good time to fix (or lock in) Interest rates on loans.  The answer is always the same – it depends on your motivation for fixing!

One of the biggest traps a borrower can fall into is to fix their interest rate with the intention of saving money compared to a variable rate.  Whilst it could certainly happen, the reality is that banks set their fixed rates based on where they think the interest rate market is going to move.

They have a department full of economists to help them figure this out.  If they think variable interest rates will increase in the next 12 months, this will be factored in when pricing their fixed rate.

Further, fixed rates are less flexible and restrict extra repayments to the loan which removes one of the key opportunities to paying off your loan faster.

So if that’s the case, why would you consider locking in rates?  The main reason is peace of mind.  It removes the risk factor.  At present rates are historically low – so by fixing all or a portion of your loan, you will achieve certainty at a low rate.

A great example of the benefits of fixed rates is the current increase in variable rates across the Banks even though the Reserve Bank has not changed the cash rate.  Those with Fixed Interest Rates don’t have to worry when Banks increase their rates.  Their repayments do not change while those of us on a variable rate have to pay more for our loans.

Some people choose to lock in only a portion of their loan. This means they reduce the risk of interest rates increasing but also get some benefit if interest rates fall.

Everyone has a unique view on the level of risk they are comfortable with.  Feel free to contact me to discuss your interest rate strategy.  I’d be more than happy to help you!

Rohan Wood – Director, O2 Finance

ph: 0422 507 705

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