To fix or not to fix?
A question that I’m continuously asked by my clients is, “Should I fix the interest on my home loan?”. And fair enough too — if there are ways to save from paying unnecessary fees to the banks, we should be onto it.
Now, they say that a good economist is one who is right 51% of the time… And if you’re asking this same question about whether to fix the rate on your mortgage, then I’m guessing you aren’t an economist either!
So to answer the question, let me break down the key factors to consider before you make this important financial decision.
The downside of fixing your home loan
In practice, I hear far more bad stories than good from people who’ve locked into a fixed interest rate term. These are usually stories from clients who’ve either: fixed their home loan to save on repayments and end up worse off because either interest rates fall, making their fixed rate loan more expensive than a variable rate loan; or the lack of flexibility in their fixed term meant they were slugged costly penalties for breaking their fixed term early, after experiencing a change to their personal circumstances.
Predictions for unprecedented times
However, in saying all of this, we are currently living through a unique time in the history of our economy. In Australia right now, we have record lows in interest rates, some banks who are increasing their variable rates irrespective of the RBA, coupled with attractive fixed rates on offer from other banks.
So in the midst of all this, locking into a competitive 3 year fixed rate for sub 3.90% (plus fees and charges) does sound like a good option… But how would I know? I’m a trained accountant, not an economist — ha!
In all seriousness though, if you are thinking of fixing your home loan, it’s really important that your individual circumstances are considered carefully before deciding to ‘lock up’ your home loan rate for a fixed period of time.
Before fixing, I recommend you consider these 5 questions:
- How long will I be in the property? If you are thinking of selling in a couple of years, then you wouldn’t want to lock into a rate for 5 years. Conversely, if you were looking to rent the property out in the future, then locking into a competitive owner-occupied rate now could be a great option.
- How would I manage if interest rates did rise? If your lifestyle wouldn’t be too severely impacted by rising interest rates, then variable might be the way to go. Conversely, if rising interest rates might impact on your lifestyle, then perhaps fixing could be a good option.
- What fixed rates are available and how do they compare to variable rates? Currently, there are plenty of say 3 year fixed rates, sub 3.90% (plus fees and charges) which could be competitive with your current variable rate. However, there are also great variable rates available for 3.69% and under (plus fees and charges). In chasing the cheapest rate in the market, you need to be careful because lenders have an uncanny knack of increasing their rates, irrespective of the RBA, so the cheapest variable rate today can easily increase in a couple of months, and it’s no longer the cheapest.
- What additional repayments (if any) do I plan to make? Lenders generally restrict the extent to which you can pay off a fixed rate loan. So if you plan to make significant additional repayments, you should consider a lender who allows this as part of their offering. Or, consider having a split loan with a variable portion where there are no charges for early repayment.
- Are there any potential events which could impact over the fixed rate period? Is there a chance you might pick up a girl (or boy) at the bar and get married? Looking to do a major renovation in which case a construction loan might be required? (an option that might not be offered by your current lender.) The list here is endless…
Your honest answers to the above questions will determine whether fixing is right for you. And if it is the right choice, you should then have a clearer idea of whether to fix rates fully, or just partially and for how long you should do this.
So, you’re still unsure of the right choice for your situation…what next?
If you’re taking the time to read this, then you really care about making savvy moves with your finances. Making chance decisions based on a helpful but simple blog post is not how you roll with your biggest liability!
Expert, personalised advice is always encouraged when it comes to protecting your home and your financial future.
I can help you with this. Click here to talk to me — together we’ll uncover your best option. Prefer to speak person-to-person, right away? Then simply give me a call on 0407 650 743.
Best,
Campbell.
Invest wisely, borrow carefully, and sleep comfortably.
