We’ve been saying for a long time (and now the RBA is finally agreeing with us), it doesn’t look like interest rates will be increasing any time soon.
So now we move into a new phase, where the banks are pre-emptively offering really low fixed rate products (around 3.65 to 3.99% depending on the loan term) which appears to be a good deaL… but are they really?
What happens when you come off the fixed loan period?
Low fixed rates are, generally speaking, an incentive to get customers to switch banks or loan products which at face value is fine however many people forget to consider a critical metric – the comparison rate. This is the average real rate that you’ll be paying after you come off the fixed rate (including fees), honeymoon period, etc, which is normally much higher than what you should be paying on a well discounted variable rate.
As former bank execs we know what you may not - which is that one of the banks most profitable 'products' is fixed rates whilst an added benefit is that it creates a sales opportunity to gain market share and lock customers down rendering them (largely) unable to switch banks. The bank sales pitch for low rate fixed typically focus on helping customers / families to budget, keep costs down, and control their costs in an every changing world, etc.
The downside to locking in a fixed rate loan
If you lock in a fixed rate you’re generally paying a premium to do so; signing up for a loan with a higher comparison rate. The comparison rate which is the rate you pay after the fixed interest period, is far less competitive than it should be. If you want to break your loan early (for any reason), then most banks charge a break fee that can be in the thousands of dollars and is very difficult to calculate. Whereas if you leave your loan on variable rates, this allows you to keep your options open and be in a position where you can seek the most competitive rates, anytime you like.
Whether fixed or variable rates are right for you depends on your life circumstances and financial situation. If you’d like all of the options explained to you from someone who is impartial to a bank, contact us on
1300 76 40 30.
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