Fixed rates are at their lowest in decades. In fact one of our lenders is currently offering a 3 year fixed rate of just 4.08% (as at 17 February 2016) for owner-occupier purposes with an LVR of 80% (or less) and P&I repayments. A deal I haven’t seen for decades!
When fixed rates are this low, mortgage holders start to consider fixing their home loan rate as an insurance policy against future rate rises.
Fixing your home loan rate may be smart when you consider where rates are at today, however your decision should be based on strategy and forward planning as opposed to speculation. Fixing can also have consequences!
So how do you decide on what’s right for you? And what do you need to consider to ensure you make an informed decision?
A fixed rate home loan has the advantage of “set” repayments for a predetermined period (i.e. the fixed term) which is an excellent strategy if you want certainty for your cash flow commitments. However there are also disadvantages which you need to be aware of before you make a fixed decision.
Here is a 7 step checklist I use when advising clients on whether to fix or not:
1. How likely are you to sell your property during the fixed term?
Breaking a fixed rate home loan can be costly, it all depends on the direction interest rates move. For example if you fix at 4% today and rates are at 3% when you sell your property, the break cost can be significant!
2. How likely are you to access equity for home improvements and renovations?
If the lender you fix your mortgage with is inflexible when it comes to releasing equity, you may find it costly to move to a lender that has an appetite for equity release.
3. Do you want to leverage the equity in your home to invest in another property and create (more) wealth?
Equity release for investment purposes can be difficult with some lenders, and again if you are forced to break the fixed term to refinance a friendlier lender, then the break cost can be significant
4. Do you plan to make extra repayments during the fixed term?
Most lenders that offer fixed rate home loans limit the amount of extra repayments that you can make. Once you go over the maximum repayment amount, you can be penalised as you will be in breach of the terms of the mortgage.
5. Do you plan to transact via your home loan and will you want to redraw your additional repayments?
Most lenders won’t allow you to redraw your extra repayments until the fixed rate term has expired.
6. Do you have a higher than average household income and require flexibility with your home loan?
A fixed rate home loan is an insurance policy against rate rises, but it can also remove flexibility and control over your cash flow. Some lenders allow a 100% offset account against a fixed rate mortgage, however this is the exception and not the rule.
7. Do you want to buy more properties and continue to leverage your growing equity to create more wealth?
A fixed rate loan can tie you to the one lender during the fixed term as the break cost may be too significant to switch lenders. This may cost you in lost opportunity and restrict you from buying more property.
There are other issues to consider, however the above 7 step checklist is what I use when advising clients, as it covers the main issues when considering a fixed rate home loan.
Fixing your rate has the ultimate benefit of achieving “certainty” with your mortgage repayments, however breaking a fixed rate loan can be costly as well as removing flexibility and control.
Speculating on rate movements is fraught with danger and making a fixed versus variable decision for the wrong reasons can be costly.
"Fixing your rate may be the right decision providing it’s based on the right strategy".
Before making any decision I highly recommend a chat with us to determine if fixing your loan(s) is the right action for you to take. A few minutes on the phone may save you a lot of cost and hassle down the track.
It’s difficult to cover all the issues relating to this topic in one newsletter so please feel free to contact us for a confidential discussion if you’re not sure what this means for you or what you should do. If easier just drop us an email.