Fixed Rate Pitfalls

Fixed interest rate loans can be an advantage to borrowers in certain circumstances:

  • when certainty of monthly loan repayments is required

  • when borrowers wish to protect themselves against anticipated variable interest rate increases

  • when there is little likelihood of a need to terminate the loan prior to the expiry of the fixed rate term

  • when borrowers do not require the benefits of normal variable rate loans  e.g. ability to make large repayments, redraw of additional funds paid

However, fixed interest rate loans can be inappropriate in other circumstances:

  • if there is a substantial reduction in variable interest rates as occurred during the Global Financial Crisis

  • if borrowers have to terminate a fixed rate loan early : substantial penalties can apply (these are known as Break Costs)

  • if borrowers require greater flexibility to make large lump-sum repayments or redraw on extra funds already paid

The following article from the Credit Ombudsman’s Office provides excellent detailed information on the potential pitfalls of locking into a fixed rate loan contract.

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