To fix or not to fix?
To Fix or Not to Fix?
With interest rates at historic lows, many people are asking themselves the same questions. Should I fix the interest rate on my home loan, or not? What exactly are my options?
The answer to this will vary depending on an individual’s particular circumstances; however, here are some points to consider.
Although there are still some economists anticipating another rate cut, many of the lenders have already factored this into their current rate offerings. With fixed rates currently as low as 3.59 per cent for 3 years, one might ask, why not fix now? It’s important, however, to understand how fixed rates work before making this decision.
The downside. Fixed rate loans can be restrictive. Most lenders now permit additional repayments during a fixed rate period but some are more generous than others. Should a borrower breach the allowable threshold there can be severe financial penalties. Equally, these can also apply when breaking a fixed rate loan. This occurs when a borrower requests to switch back to a variable rate or another product type before the fixed rate matures. It also occurs in the event of the property being sold before the fixed rate period expires. Break costs are determined by a number of factors, including the current available rates, the rate the borrower is fixed into and the remaining term of the fixed rate. This break cost can only be calculated at the time of breaking the fixed rate loan.
The upside. Fixed rates can provide budget certainty and this can be beneficial for both home owners and investors. For investors, it provides a fixed cost which makes sense when there is a fixed income (rent) from the investment. This allows for more accurate budgeting and income projection for investment portfolios. Owner occupiers can also benefit by fixing home loans to provide some protection and insurance against potential rate increases which could cause financial stress due to increased repayments.
The alternative. There is also the option of a combination home loan i.e. a partially fixed, partially variable rate home loan. This can offer “the best of both worlds”, budget certainty with a partly fixed rate loan and the flexible option of additional and lump sum payments on the variable loan portion which also allows a 100 per cent offset account.
Our biggest tip? Consult one of our team for advice and guidance on all of the options available in order to make an informed decision. We have access to a diverse range of products and can tailor a financial solution to meet current and future needs.