Shopping for interest

Greg and Sarah are looking hard at the interest rates currently available. They could take a loan with a fixed rate for two years where the interest is one percentage point below the floating rate. On their $150,000 loan, Greg calculates that opting for the fixed rate will save them around $3,000 over the two years, assuming the floating rate doesn’t fall.

But could they cut their interest bill even further by taking a much longer fixed term rate? Sarah isn’t so sure. She has some relatives who took a five year fixed interest loan a few years ago when the fixed rates were lower than the floating rate. But well before the five years was up, the floating rate had fallen to below the interest rate her relatives were paying.

Greg and Sarah talk to the staff at their bank, and find that the bank’s economists are recommending two year rates. With no strong reason to take a longer fixed interest loan, Greg and Sarah settle on a two-year term.