Fixed Interest Rate Loans
Fixed Interest Loans
Fixed interest rate lending can be either interest only or principal and interest repayment and will involve locking the rate of the loan over the fixed term, normally from 1-5 years or longer with some lenders. Offset will predominantly not apply for fixed rate loans, though there are a few lenders that offer partial and full offset, though these are exceptions.
Fixed rate loans will normally come with an additional repayment restriction, which on average will work out to be an additional $5,000 per annum over the contracted or minimum repayment during the fixed period. Some lenders allow less, some more and a few will allow the additional repayments to stack up over the term. An example of this is in the fourth year, you can pay an additional $20,000 off as a lump sum if you have not paid any additional funds off the loan over the first 4 years of the fixed period.
Fixed rate loans are normally taken for those wanting to accurately budget for their expenses for a foreseeable period and are quite popular for investors. But exercise caution with fixed rate loans – if you are forced to pay out your loan in the fixed period, you may be liable for a break cost. A break cost represents the bank’s loss in interest over the remaining fixed period. Break costs are very difficult to ascertain, as they depend on the market conditions and rates at the time the loan was initially fixed, as compared to when the fixed loan is broken. As a rule of thumb, if you fix in a low rate environment and break in a higher rate environment, chances are you will have minimal or no break costs. Conversely, if you fix in a high rate environment and break in a low rate environment, you will incur a break cost over the remainder of the fixed term.
Discounted Interest Rate Mortgage
Discounted mortgages or introductory mortgages normally involve a higher discount for a new customer for their first year with the lender, being either a low fixed rate or a discounted rate. A discounted rate will move with interest rate changes, but the fixed rate will not. Generally the rate will revert to standard after the initial fixed or discounted period.
There are other products in the discounted space that will discount over an extended period, normally around 3 years, but there is a lot of turnover in this area. Innovative products tend to pop in and out of existence within the Discounted mortgage category. Many products are designed to lure in new business, but Loans My Way has found some excellent products for clients in this space over the years.