You’d be living under a rock if you didn’t know interest rates have been steadily declining. This is due in part to the official cash rate (OCR) decreasing over the last 11 months. Depending on what camp you sit in you'll either be pleased or disappointed with the lower rates.
Borrowers who've recently borrowed will benefit from the savings the lower interest rates bestow. Term deposit holders however will undoubtedly suffer, as rates of interest on offer are reduced.
Prior to borrowing funds or refinancing, borrowers tend to focus on securing money at the cheapest rate possible. We can appreciate this, but there are other factors that should be considered too. These factors can actually be more important than scoring the lowest interest rate on offer as they can make a difference in minimizing the interest paid over the long term.
When looking to borrow money, the majority of people seek a lender that will offer them the mo-lah at the sweetest rate possible. Whilst this is sensible, solely chasing the lowest borrowing rate on offer may do borrowers a dis-service.
A better approach for borrowers to consider is adopting a loan strategy most appropriate to their circumstances and objectives. Once a strategy is identified, turning attention to finding a loan/s that’s a best fit should be the next step in the borrowing process.
Some borrowers need the certainty of knowing how much their loan repayments will be over the term of their loan. This knowledge assists in budgeting. Equally importantly it provides comfort, permitting people to get a good night’s sleep knowing that if interest rates increase, their loan repayments will remain the same. If you fit into this category, borrowing money with a fixed interest rate that doesn’t change over the loan term irrespective of loan market conditions, is a good strategy for you to apply. Most certainly, it is a smart choice for those on fixed incomes.
With advantages comes disadvantages and fixed interest loans are no exception. Two distinct drawbacks apply. Firstly, if interest rates decrease, you won’t enjoy a reduction in loan repayments because you will be stuck paying interest at the higher rate you agreed to. Secondly, often there are limits on how much extra money you can repay off of the loan without incurring penalty charges.
As the name suggests floating loans result in loan repayments changing over the course of the loan. Repayments go up and down – float in other words, as a consequence of changes in interest rates.
Because of their floating nature, a distinct disadvantage is the uncertainty as to the quantum of repayments these loans inflict. Hence, those that find uncertainty nail biting should probably not implement a floating loan strategy.
On the flip side, the principal advantage of a floating loan is usually it enables borrowers to make extra lump sum repayments free of penalties. Thus, if you are a borrower that needs the flexibility to repay principle, choosing a floating loan may be a good strategy to adopt. For instance, self-employed people who receive lumpy income, those who are about to come into funds via the sale of an asset or the receipt of an inheritance and those that need bridging finance may find this type of loan appropriate.
Maybe as a borrower you want to have the best of both worlds. This is entirely possible for borrowers who chose a lender that permit borrowers to split their loans between fixed and floating interest rates. Accordingly, if you are a borrower who enjoys certainty whilst wanting flexibility, selecting a lender who permits borrowing on this basis, is a sensible strategy to employ.
Once you’ve chosen a borrowing strategy you’re ready to shop around for a loan. Loan terms and conditions, including interest rates, then become relevant.
When contemplating interest rates, the period you want the loan for is usually a factor borrowers consider. At the time of writing, the shorter the term the loan is fixed for, the higher the interest rate it is offered at. For example, current bank loan terms of say 6 months are offered to borrowers at a higher rate of interest than loan terms of 2 or 3 years.
You can have your cake and eat it too when it comes to terms. Some lenders will let you split up your borrowings into different amounts, over different periods of time. This is known as ‘tranching’ and is a smart play for many borrowers to consider implementing.
Whether you’re a homeowner borrower or an investment property borrower, adopting a strategy appropriate for you is sensible. Strategy selection enables flexibility to adapt to life’s changing circumstances, which can assist in paying off your loan quicker than what you might otherwise do. In other words, your strategy is just as important, if not more important than choosing a loan based purely on the cheapest interest rate available.
Whilst we don’t offer borrowing advice at Greenlion, we are familiar with the services qualified experience loan brokers offer clients. These professionals are worth their weight in gold being familiar with current loan terms and conditions offered by different lenders. One of the tools your loan broker will need to help you select the right strategy, is up to date financial statements. In some instances, they may also need cash flow projections. For this reason, we urge clients to ensure their accounts are completed prior to their need to borrow, which is an area we can definitely assist in.
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