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 into 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.
Floating & Variable Rates
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.
This type of loan is ideal if you need an on-going credit limit which allows you to access funds at any time.
* You can make repayments at your own pace.
* You can also use it to make extra principle payments paying your loan off quickly.
* Your surplus income every month works to reduce the mortgage balance and overall interest payable.
* It’s like an overdraft on a transaction account with no set principle repayments.
* Redraw additional funds up to your credit limit anytime without having to apply.
* Interest is calculated daily and charged monthly.
People often use their credit cards for all spending making use of 55 days of interest free credit, then once a month pay off the credit card. This keeps the loan balance in the revolving as low as possible for as long as possible saving more on interest. You need to be very disciplined to keep within your loan limit. You should make sure your income exceeds your outgoings, to reduce the loan principal as quickly as possible. Spending less than your income each fortnight will see the balance on your loan account lower more quickly than a standard loan account. You also end up paying the loan off faster and paying less interest over the term of the loan because you are constantly reducing the loan balance. The downside is that it’s tempting to redraw funds when you have paid off a chunk of the balance. There is often a bank fee for this type of loan $10-12 a month. It suits high income earners, borrowers disciplined with their money, the self-employed and property investors.
‘Interest Only’ is a form of payment normally available for when you have at least 20% equity. No principle is paid, just the interest portion of the loan. It’s popular with Property Investors to help keep loan payments down and ease cashflow. Most banks tend to limit how many years you can do this option.
The simple way to work out Interest Only payments is take the loan principle amount, times by the interest rate to get an annual interest figure. Then divide this amount by 12 to give an approximate monthly repayment.
Offset loans help you save in interest costs by subtracting (offsetting) any credit funds you have in your transactional/savings accounts from the total amount owing on your floating offset loan. Meaning you are only paying interest on the difference. Monthly payments tend to stay the same so more dollars pay off principal.
This is a good structure if you want to focus on saving as well as paying off your home loan while also reducing the amount of interest you are paying.
Note: Most banks charge a $10 fee for an Offset loan.