Fixed Rates, Myth: Can you offset a Fixed Rate?

Fixed Rates, Myth: Can you offset a Fixed Rate?

Peter Oates
4 minute read

Fixed rate? For the purpose of this article it is important to understand that I am not recommending to Fix or not to Fix, although Fixed Rates are quite attractive in this current market. I am here to discuss the myths related to fixed lending.

A client should only fix their lending for certainty with their banking, understanding that a Fixed Rate product will guarantee your interest cost for a period of time.

Historically, Fixed Rates in Australia rarely work out financially cheaper than variable rates, not to mention the break costs and repayment restrictions.

I'm going to bust a widely believed myth that you cannot get a Fixed Rate with a 100% Offset Account feature.

100% Offset Account, not a partial Offset Account

Many Australians believe they cannot offset a Fixed Rate and so commonly either do not fix due to this or fix a far smaller portion of their lending to ensure they have an offset account feature, leaving a variable portion. More experienced clients are aware that you can get a partial offset with a fixed rate, which means a percentage of the interest is reduced by the funds in the offset account during the fixed period. However, it is unusual that I find clients are aware they can gain access to a Fixed Rate loans with a 100% Offset Account feature. My clients are even more surprised to discover that these Fixed Rate products with 100% Offset Account feature also have some of our most competitive interest rates for both Owner Occupied Home and Investment loans.

No need to estimate future savings as you can Offset the Variable and Fixed portions

For decades I have been working with clients to calculate the portion of their loan they should leave variable enabling an offset account feature during their fixed rate term. This involves attempting to estimate the amount of savings the clients may accumulate over the fixed period, adding this to their current cash savings to produce discovering the amount to be left variable. This often results in the client either underestimating or overestimating their future funds. An underestimation can be quite costly with the client having more funds available than they can offset and therefore paying more interest than they should during the fixed period.

With the 100% Offset Account on a Fixed Rate you don't need to estimate your cash savings, as you can offset both the Variable and Fixed portions.

You can fix the entire loan and still offset your interest rate

Having a 100% Offset Account feature on fixed rates also allows clients to fix the entire Owner Occupied or Investment loan. This is quite useful for clients that are seeking a fixed rate and prefer none of their lending to be variable. By having 100% Offset Account feature on the Fixed Rate loan, this empowers clients to fix up to 100% of their lending with the ability to offset and no requirement for a variable portion. Having an offset feature allows you to access your cash at anytime.

Enables virtual extra repayment of debt during the fixed period

Another aspect of having a 100% Offset Account feature with your Fixed Rate is that you can pay as much into your offset account as you wish during the fixed period. This counteracts the standard restriction of most Fixed Rates which normally limits extra loan repayments to $5,000 to $10,000 per annum.  Instead of paying down the fixed rate a client can simply pay more funds into their Offset Account reducing the interest they are paying during the fixed rate period, having a similar effect to making extra repayments.

Important questions for your lender are:

·     Does your Fixed Rate loan have a 100% Offset Account, Partial Offset Account or is the Offset Account not a feature of their Fixed Rate product?

·     Is there a maximum amount you can pay off per year or over the Fixed Rate period?

·     Do you offer security portability should I wish to release the security and substitute it with another security during the Fixed Rate period?

·     What will be my interest rate after the Fixed Rate period expires?

Lendtribe is available to discuss the answers to the above and you can contact me directly Peter Oates, Senior Advisor on Peter.oates@lendtribe.com.au

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