Flexi or fixed bond interest rate?

Feb 26 2013 07:34

A first-home buyer wants to know which is best – flexi or fixed interest on a homeloan? He writes:

What is the current interest rate for home loans? And what is considered a good rate given by banks?

Which is the better option: flexi or fixed rate?

FedGroup Property Consultant Slento Little responds:

Normally, the interest rate you are offered is based on the size of your home loan. A good interest rate in the current market is prime. Previously, home loan applicants would enjoy as much as a prime -2.

However, the current prime interest rate level has resulted in a lack of appetite from the banks to provide below prime.

When deciding between a flexi  (known as a variable rate) and a fixed rate, you need to take your appetite for risk into consideration.

A flexi rate fluctuates. It is linked to the prime lending rate. A change in the prime lending rate will result in a proportional change in the interest that you pay. 

Essentially, this means that you would receive the benefit of a cut in interest rates, but by the same token, you would also be subjected to the full impact of any increase in the rate.

A fixed rate gives you the benefit of knowing what your instalment is for a fixed period of time, regardless of the prime lending rate. Fixing your rate comes at a price, as the lenders increase the rate provided to the applicant to absorb the bank’s risk. 

The value in a fixed rate is that it provides you with peace of mind. Households on a tight budget, with little anticipation of increased income, will benefit from the certainty provided by a fixed rate.

At the moment, interest rates are low. The possibility of them being increased significantly in the short term is unlikely because of the position of the economy on a global scale.

Applicants who have an appetite for risk are encouraged to opt for a flexi rate and thus take advantage of the lower interest rate environment.  

 - Fin24

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