Tuesday, February 25, 2014

The benefits of a fixed interest rate

Housing loans come in various forms and packages, each offering different interest rates and loan terms. With the many low home loan interest rates on offer today, taking advantage of these low rates may seem like the best option, however, these low interest rates are typically fixed for only a short time and are subject to annual re-pricing after the fixed period. A higher but fixed interest rate may be more beneficial over the long term. Read on to discover the benefits of a fixed interest rate.

Having a fixed interest rate will make for a predictable payment scheme and help you avoid defaulting and even foreclosure.

A more stable payment scheme

Having a fixed interest rate on a home loan will provide a more stable payment scheme, making for a more steady financial situation as well. 

For regular income earners who rely on a fixed salary for income, a sudden increase in monthly payments without an increase in their salary may prove to be detrimental to their financial situation. Having a fixed interest rate will make for a predictable payment scheme and help you avoid defaulting on your home loan and possible foreclosure. 

On the other hand, real estate investors, particularly those who bought a property to lease out, may also be affected by increases in amortization costs. Rental income may be depleted by increased interest rates, or worse, the investment may become a money pit instead of an income generating investment. 

Protection against financial crisis

Annual re-pricing of interest rates is governed by interest rate fluctuations and volatile economic conditions. Having a fixed interest rate will provide protection against sudden increases in interest rates, particularly in tough financial times. 

Alternatively, you may also benefit from a rate protection feature in your home loan. Banks that offer rate protection usually give a limited increase of two percent during re-pricing. This offers some level of protection for volatile interest rate fluctuations, but is still not as complete as that of a fixed interest rate. 

Peace of mind

Finally, a fixed interest rate gives you peace of mind unlike any other. Knowing exactly how much you need to pay every month will help you plan your finances well and guide you in your expenses and savings.

Understandably, this may not be the best option for everyone, however, with the many options for loan terms available today, you can always choose a loan with a fixed interest rate for a longer term. This will buy you more time to pay off most of your loan before interest rates go up. If you’re considering paying off your home loan earlier than its maturity date, beware of penalties and fees. Banks usually set the penalty at two percent of the original loan amount.


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