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Fixed fix or not to fix?

Fixed Rate: An interest rate set for an agreed term. Eg. for 2, 3, or 5 years.

Fixed rates are akin to a contract – you agree to pay the lender that interest rate and repayment for a set period of time. Treat them as seriously as a contract, but enter into it happily if it suits you well.

They are convenient in that you know exactly what your repayments will be over the time but there is a payoff; most people believe that in the majority of cases the bank wins (I know I have certainly been glad of a fixed rate at times, so I’m in two minds about this); and you will lose some flexibility - so it’s important to consider your short and medium term goals in relation to fixing.

Generally, if you have no plans or needs to change property or lender, and your budget is tight or it’s your first loan and you’re finding your feet - and especially if the fixed rate is lower than the variable rate – which happens from time to time; then you have to at least have a good think about your options.

On the other hand, if you have the ability and the intent to make additional repayments regularly, you want access to these repayments, or you need flexibility then you have to consider leaving part or all of your loan variable.

The kicker is break fees which are a penalty that apply if you have a fixed rate loan and you –

  • Pay off more than the maximum allowed

  • Sell the home

  • Or refinance the loan

Break fees can be huge – biggest I have seen is $17,000 and the smallest was only a few dollars. Education and advice is the key to taking advantage of fixed rate lending.

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