Fixed interest rate
The flip side of variable interest rates, fixed interest rates are one of the two main types of interest you’ll come across when choosing a loan or bank account.
So what do you need to know about fixed interest rates? We’ve gathered some of the important information we think you should know when you’re looking at fixed interest rates, including pros, cons, facts and features.
What is a fixed interest rate?
Like the name suggests, a fixed interest rate means your interest won’t change over the life of your account or loan - it’s fixed at a certain rate. Usually a fixed rate will last for a term of 1-5 years or sometimes more, especially on a home loan. Shifts in the market won’t affect your interest rate during this time.
A fixed rate offers security and certainty, but in return, is often fairly rigid in terms of extra features.
Pros of a fixed interest rate
- Makes budgeting easier. Because your interest rate doesn’t change, your monthly repayments on a loan will be the same each time. You should be able to calculate a budget that stays pretty much the same each month.
- A sense of security. If you expect interest rates to rise, or are just nervous about what the market might do in the future, a fixed interest rate offers a sense of certainty in the form of unchanging repayments or earnings.
Cons of a fixed interest rate
- Less flexibility. Often, fixed rate products don’t offer the same flexibility in terms of extra features as those with variable interest rates do. These features can help you tailor payments to suit your budget, so they might be a big influence on your interest rate decision.
- No benefits of changing rates. If interest rates change in your favour - rise in the case of savings or drop for loans - you won’t get the benefits, as your interest rate is locked in.
- Penalties for early repayment. Think you might want to take advantage of features like extra repayments on a loan and repay it early? On a fixed rate loan, you may be charged penalties for doing so, so think carefully before making a move!
How is a fixed interest rate determined?
Your bank will offer you a fixed interest rate based on what changes they expect from the market over the fixed term. If interest rates have been low, fixed rate offers will often be a little higher than variable rates, because it is likely that market rates will rise before they fall even further. On the other hand, if interest rates have generally been high, a fixed rate might be set slightly lower, to entice customers to lock in at that rate before the market drops.
What happens at the end of the term?
Once the fixed term is up, you have an option to either transfer to a variable interest rate, or lock into another fixed rate term. If you’re opting for another fixed term, remember that your original interest rate won’t automatically transfer over - so check that the new interest rate you’re being offered is competitive. If not, it might be time to consider refinancing options.
Not sure? Why not split your interest rate
Maybe a variable rate seems a little too unsecured for your tastes, but on the other hand, a fixed rate seems like a big commitment, especially if you’re looking at a 25 year home loan. So why not have the best of both worlds?
Some lenders offer a split loan option, which allows you to have part of your loan at a variable interest rate and part at a fixed rate. This gives you the flexible options of a variable rate, combined with the security of a fixed rate.