All Topics / Finance / what are the dangers of changing from fixed to variable interest rate.

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  • Profile photo of Hannah SeanigerHannah Seaniger
    Member
    @hannah-seaniger
    Join Date: 2007
    Post Count: 8

    Hi,

    I want to reinvest in a positive geared property.  We have the financial position in the banks eyes but not the deposit for the closing costs; about 25K

    We have 10K but want to use this to pay off our personal loans before anything else.

    Westpac advised me that I can "Top Up" our first home loan by 25K without any extra charges eg: breaking loan charges. BUTTTTT I would have to break out of our "fixed" interest 7.35% rate to "variable" 7.58% !  Because our loan will then exceed $250K the interest rate will be discounted to 7.36%, but still variable.

    Please help me.  what are the dangers of changing from fixed to variable interest rate.

    Profile photo of Hannah SeanigerHannah Seaniger
    Member
    @hannah-seaniger
    Join Date: 2007
    Post Count: 8

    I have put the above posting out there and I have had no reply.  Is that because I have mentioned a banks name and specific information or is it because people don't feel confident giving their opinion on comparing 'fixed' and 'variable' interest rates?

    Hope someone out there can help with this topic as I am really unsure.

    I have the option of consolidating my 2 personal loans by "topping up" our home loan by 25K and then using the $1000 F/Night to put into a offset A/C and save for the 25K deposit for next investment.

    There are no breakage charges the ONLY thing is I will need to move out of the 3 yr Fixed to a Variable interest rate!

    Any Ideas?????

    Profile photo of v8ghiav8ghia
    Member
    @v8ghia
    Join Date: 2005
    Post Count: 871

    Hi Hannah. Sorry no one has replied to your post yet – nothing to do with the contents I'm sure. With your scenario, people choose fixed interest rates for a reason, some regret it later others are pleased, but regardless of which way you choose (you can also split a loan too and 'hedge your bets' or structure it to suit your lifestyle….)  the MAIN PROBLEM with exiting a fixed rate loan early is the whopping early repayment fees, sometimes politiely called 'break costs'. This can be thousands (even 10's of thousands) dollars, so generally people would not exit a fixed rate loan early without good reason. However in your case, if as the last line of your post states, there will be no break charges, and the only problem you see is a variable rate loan, it's purely up to your own preferences and if doing so will help you with your finances. Sounds like a good offer if the only drama is switching your chosen interest method….as long as you are happy with variable (like around 70% of other people) All the best

    Profile photo of master01master01
    Member
    @master01
    Join Date: 2007
    Post Count: 2

    The benefit of a fixed-rate interest loan is that you know how much you will pay every month throughout the life of the loan. For some homeowners, knowing that the payment will never change — no matter how much they earn each month — is worth paying for.

    A variable rate loan means that the interest rate will fluctuate over time. Sometimes it will go down and other times it will go up. If you're comfortable with not knowing exactly what your payment will be, but knowing there are some safeguards in place with respect to how much the rate can rise or fall in a single year, then your increased risk tolerance is rewarded with a lower interest rate.

    Profile photo of MortgagemanMortgageman
    Participant
    @mortgageman
    Join Date: 2004
    Post Count: 164

    Hi Hannah,

    Why don't you just add an extra variable facility on top of your fixed facility against your existing property. This shouldn't be a problem at all and would save you breaking your fixed loan. Under almost  no circumstances should you break your fixed rate under the current environment as another rate rise soon looks almost inevitable. I hope this helps.

    Kind Regards,

    Cameron Perry
    Director
    Perry Financial Strategies
    Level 13, 30 Collins St
    Melbourne VIC 3000
    Ph (03) 9662 1999
    Fax (03) 9662 2044
    http://www.perryfinance.com

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