Marcus Garvey Case Summary

1998 Words 8 Pages
Is it preferable to fix or float interest rates in the current economic environment? This is the question now facing Marcus Garvey, who is planning to buy his first home in October of this year. Making the right judgement on whether to fix or float interest rates on a mortgage, in conjunction with what period of time, could be the difference of thousands paid to the bank in additional interest. In order to assist Marcus in this decision, several variables must be considered. The first and most significant factor is to determine what interest rates are expected to do in the short term future. Secondly, to assess the advantages and disadvantages of both fixed and floating loans and how these will affect Marcus, based on the information we know …show more content…
First and foremost in advantages for a floating rate, is flexibility. A floating rate allows a person’s interest rate to fall in line with the current market rates, meaning that a person’s payments will consequently fall if market rate does; furthermore it allows additional payments to be made, without any financial penalty. They could decide to make a lump sum payment at any time, or pay off the entire loan, if they were lucky enough to come into extra money. Additional benefits include the option to convert to a fixed rate at any time, if say the market rates were to rise at a faster rate than expected, or if the bank offered an extraordinary rate. They additionally have options as to the structure of their loan when it is floating, either; table, which is structured to provide consistent regular payments, each of which has less interest and more principle than the previous, interest only; when borrowing short term until the principal is paid in full, and reducing; where payments reduce over time. Some of these advantages do unfortunately fall under the disadvantage category. Furthermore to market rates being able to decline, they also may rise, and therefore, payments would rise. Along with this, a floating interest rate causes it to be difficult to predict what a person’s payments may be, therefore more difficult to plan and budget for …show more content…
The most advantageous is that interest repayments are set for the entire agreed period; therefore even if market rates were to rise astronomically, repayments would stay constant. This as a consequence helps retain predictable payments and takes out the need to stay up to date with market movement. The disadvantages can include penalties being charged when additional payments are made, less flexibility, and payments staying the same even if interest rates fall drastically. Based on the current situation with market rates expected to rise, the advantages of a fixed rate tend to outweigh those of a floating rate. The reserve bank has, in theory, paused further interest rate hikes until December, which will allow Marcus to access and secure a favourable rate in October, before these start to rise along with the official cash rate. (Hickey,

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