Go deeper and interest rates may not be as they seem

INTEREST rates are at record lows, and it's now even possible to obtain a loan with a rate of 4.99% fixed for five years. 

Well, that's what the advertisements say, but look closer and you'll also see that the "comparison rate" may be around 5.6%.  This is the effective rate, when all the other fees and charges that banks love to hit us with are added.

Banks are compelled by government legislation to display the comparison rate but keep in mind that it is only a starting point. 

Even though it includes the basic loan costs such as set up fees, interest rates and ongoing charges it does not include bank fees that are only charged in certain circumstances.

These include fixed loan early termination fees and redraw fees. 

But there is more to a loan than the interest rate and the fees and charges. One of the most important things to consider is flexibility. 

Now you might believe that a no frills loan with low fees is perfect for you right now because your affairs are simple and your present intentions are to stay in the one house for many years, but keep in mind that change is always with us, and your present loan may not be appropriate if things change.

What happens if you decide to move house, or borrow some money for renovations or investment, or need to reduce your repayments as the kids are at high school.  If you have one of the no frill loans it generally won't have a redraw facility and you may be required to take out a second mortgage for the extra money. 

Naturally the bank will be looking for a higher interest rate on the second mortgage and the extra fees could wipe out all your initial savings.

The big question now is whether to switch to a fixed rate or stick with a variable rate, or even opt for a cocktail rate where the loan is part variable and part fixed.  You are the only person who can make that choice, but it would be reasonable to expect that we must be close to the bottom of the interest rate cycle.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noelwhit@gmail.com.