To fix or not to fix?

With two interest rate drops already by the Reserve Bank in 2012 and possibly more to come, the banks have reduced their longer term interest rates to a level sometimes below the standard variable rate.

Depending on the amount borrowed, the bank and the type of package you are on, a 3 year fixed rate can be cheaper than the current variable rate. A fixed rate of course gives you certainty in the future that if rates should rise, you are protected….but what if rates fall. Locking in a fixed rate means you will miss out on any future drops and in most circumstances you are limited to paying off the loan quicker without penalty.

Leaving a loan on a variable rate gives you the most flexibility, the ability to redraw and the ability to change banks should a better deal be elsewhere. If rates rise then you aren’t protected from rising repayments. There is a point in the interest rate cycle where locking in a fixed rate is highly beneficial in the short and medium term. When that point is no one knows until after the fact.

Depending on your individual circumstances locking in an interest rate could work to your advantage; it could also be a disadvantage. Hedging your bets each way is also an attractive option if your bank allows you to split your loan.

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