Robert and Kim are on fixed salaries, and they never get bonuses or overtime payments. They know money will be a bit tight in the first few years of their home loan.
They decide to take a loan with 80 percent borrowed at a fixed interest rate for two years and the balance at a floating rate. Having so much at a fixed rate will help with their budgeting, while the small amount at the floating rate will allow them to increase their payments at no cost if either of them gets a higher-paying job.
They looked at a revolving credit mortgage which friends had recommended, but Robert and Kim decided that they didn't need that amount of flexibility. They also felt that they might not have the discipline to cope with an eftpos card which would let them spend up to the whole amount of the credit available on the loan.
Money paid in return for the use of money. If the bank is using your money (in a savings account) they pay you interest. If you are using the bank's money (via a loan), you pay the bank money.
The rate of interest paid on a loan may be either a fixed rate or a floating rate. For a floating rate loan, the interest varies from time to time. If interest rates fall, then so does the amount you have to repay. Or you can choose to continue with the same level of repayment and reduce the term of your loan. However, if interest rates rise, then the opposite effect happens, either your repayments need to be increased or the term of your loan is extended.
The rate of interest paid on a loan may be either a fixed rate or a floating rate. For a fixed rate loan, the interest rate is set at the date you take out your loan and remains the same throughout the term of your loan, irrespective of whether bank interest rates rise or fall.
