Floating interest rate loans
A floating rate (or ‘variable interest rate’) is when the interest rate can vary with the market, so your repayments may go up and down. There is no set period for a floating interest rate other than the total loan term. Most lenders have a 25 to 30 year limit on how long you can take to repay the full loan.
The interest payable on a floating interest rate loan varies depending on market conditions, represented largely by Reserve Bank changes to the official cash rate. Floating rates are often higher than fixed rates but provide you with the flexibility of lifting your regular repayment amounts or making lump sum payments throughout the term of your loan. These lump sum payments can be made without any break cost fees.
Revolving credit or flexi loans also have floating rates attached.
Fixed interest rate loans
A fixed interest rate loan allows you to fix the interest payable on your loan for a set period, usually from six months to up to five years. With a fixed interest rate, your payments stay at the same level for a set time. You have the comfort of knowing that you won’t be affected by rises in floating interest rates. However, if interest rates fall, you will still be locked in to your regular repayment level for the period you have agreed with your lender. You can break a fixed interest rate arrangement by repaying early but there are costs involved.
When a fixed rate period ends, lenders will automatically move you to a floating rate loan, unless you agree to a further fixed rate period. Most lenders send you a letter a few weeks before your fixed rate period is up. Wellington Mortgage Brokers also contacts their clients prior to a fixed rate expiring so we can help our clients check the market and negotiate new rate options on their behalf.
Some lenders allow a limited lump sum repayment amount that can be made on a fixed rate loan without penalty. Other lenders may not allow lump sums without penalty, but will instead allow you to increase repayments by up to 20% or up to $1000 a month. Some lenders will allow you to set a higher repayment above the minimum right at the start of the loan. You can also look at splitting your loan up so that you have a mixture of fixed and floating rates.
We can help you with your loan structure and rate negotiations to suit your situation.
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