We’ve been enjoying record low interest rates for years now. Indeed, many investors on variable rates have probably benefited from some of the drops in interest rates by having more money in their back pocket.
Interest payments made on a loan are tax deductible, so for some, depending on how the property is geared, the rise and fall of interest rates may affect the amount of tax they need to pay and/or the income they receive.
However, with predictions of the possible return to higher interest rates in the next six months hitting the headlines recently, homeowners and investors alike are probably wondering whether they should be looking to fix the interest on their loan repayments.
Fixed loans are exactly what they sound like – they have an interest rate that is fixed for a set period of time. This period of time can vary, but is typically for 1, 3 or 5 years. At the end of the fixed rate term, the loan will usually switch to the standard variable rate offered by the lender.
Here are some of the pros and cons to fixing your rate:
- Set amount going out each month makes budgeting the monthly bills easier.
- When rates rise, you win – the chances are you will not be affected and you will continue paying the same rate regardless.
- Less stress, both mentally and financially, when there is an unexpected rate rise.
- Often don’t get the added benefits some loans come with, such as a redraw facility.
- When rates are falling, you lose. You will continue paying the mortgage at the rate you fixed it at regardless.
- There are often limits on extra repayments you can make.
- You may incur break fees if you change or pay off your loan early.
The best of both worlds
Ultimately with all the variables you have to decide on how much risk you’re prepared to take. If you really can’t decide and you want to spread the load, some providers do offer the option of splitting your loan! Part of the loan is paid at a fixed rate, and the rest paid at a variable rate.
Speak to a specialist
A good financial specialist will talk you through fixed and variable rates so you fully understand the risks, benefits and drawbacks involved with both options. Furthermore, they often will help you with number crunching and will show what you could expect to pay if rates suddenly rise. This will help with your budgeting, particularly if this is your first loan.
Want to know more about investing in property or how our property management services can help? Get in touch! Our talented and experienced team would love to share its knowledge with you.
We’ve been in the market for over 40 years which makes us one of Newcastle’s longest established real estate offices, so give us a call on 02 4954 8833, send us an email to email@example.com or pop into our Cardiff office for a chat.