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What is a Fixed Rate and it's Advantages and Disadvantages
Published by Scott Miller
What is a Fixed Rate?
A fixed interest rate is an interest rate that remains the same throughout the specified term of the loan. Typically fixed rates are agreed upon between 1 to 5 years.
This means that the borrower will pay the same interest rate on the loan for the entire fixed period even if the market rates change. This contrasts with adjustable-rate (floating) loans, in which the interest rate can change over time based on changes in market interest rates.
Advantages of a fixed interest rate:
- Predictability: Budgeting and financial planning becomes easier as borrowers know exactly what their interest rate and monthly payment will be for the life of the loan.
- Stability: A fixed interest rate provides stability in an unpredictable interest rate environment, protecting borrowers from unexpected increase in loan costs.
- Rate: Fixed rates are typically lower than adjustable (floating) rates, meaning borrowers may pay less in interest over the life of the loan.
Disadvantages of a fixed interest rate:
- Limited flexibility: Borrowers may be locked into a higher interest rate if rates fall after the loan is taken out.
- Lump repayments: Many lenders will limit extra 'lump' repayment amounts during a fixed period.
If you have any further questions or would like to discuss your mortgage options, please don't hesitate to reach out to us - we'd love to help.
You can contact us by phone at 021 34 36 48 or by email at scott@amsnz.co.nz.