To fix or not to fix your interest rate – that’s the question. A simple question but, unfortunately, not a simple answer, but one we can help you with, given the particulars of your current loan.
The interest rate landslide over the past several months has left most home borrowers wondering if this is as good as it gets. Many have been contemplating whether or not to fix their mortgages and possibly reap the rewards of low, locked-in rates.
But just when borrowers reached for the calculator, fixed rates crept up, leaving many of us scratching our heads.
The problem is that fixed rates are based on what the economy may do over the medium to longer term, while variable rates stay more in line with the current market conditions and are often aligned with the official cash rate set by the Reserve Bank of Australia and the signals we receive in the short term may not be reflective of where the market may be heading in the medium to longer term.
So with the possibility of variable interest rates dropping even further and fixed ones edging up, is now the best time to lock in a rate?
Ultimately, it depends on your individual circumstances.
The good news is that both variable and fixed rates are currently very low, so it’s really a case of working out how to maximise these favourable conditions for your finances.
Borrowers need to understand the pros and cons of variable and fixed rates and stack those up against their financial situation and goals.
Of course, the risk of having options and so many opinions in the market is that many people may do nothing and miss an opportunity.
So what are the pros and cons? The obvious benefit of a fixed rate is that your loan repayments stay the same for a set period – usually one to five years – even if market interest rates go up. For some home owners, that sort of certainty in a fickle economy brings breathing space and peace of mind. The downside, of course, is that market interest rates may drop, leaving you paying more.
But there are other less obvious advantages and disadvantages that you should weigh up when deciding to fix or not to fix.
For example, most variable loans allow you to make extra payments without penalties. When rates are low – like now – borrowers who budget wisely can really make some inroads into their debt and pay off their loan quicker. Variable loans also generally have lower break or exit fees, something to keep in mind if you want to sell your house within a few years.
Another option is to consider splitting your loan between a variable and fixed rates. In borrowing terms, it’s an each way bet. How you split it is up to you. So if, for example, you had a $400,000 home loan and decided to split it 50-50 between a variable and fixed rate, the repayments on $200,000 would be exposed to the ups and downs of the rate cycle, while payments on the other $200,000 would be fixed.
The benefits of a split loan is that you can take advantage of rate drops, while still having some protection against rate hikes.
If you would like to know more about your options when it comes to fixed and variable rates, get in touch with us and we’re happy to walk you through all the options and help come up with the perfect solution.
Fixed Rate
PROS
• You can forecast your budget with certainty.
• Your pain threshold may be reduced if your circumstances change, e.g. have children, switch jobs, children move into high school.
• You may save if you can lock into a low fixed rate ahead of any variable rises.
CONS
• If interest rates dip well below your fixed rate, you could be paying much more than you have to.
• Restrictions on additional repayments.
• Possible high break fees if you want to escape your loan during the fixed term.
• Most fixed loans don’t have added features, such as an offset account. Variable Rate
PROS
• If interest rates drop, you reap the rewards.
• You have the flexibility to make additional payments to get your loan paid off faster.
• Many of the key discounts you receive on a variable rate are not available on fixed rates.
• You can take advantage of the benefits of an offset account.
CONS
• You may find it hard to meet your mortgage payments if the variable rate increases beyond your expectations and budget.
• You may need to have a financial cushion if rates do rise.
• Your lifestyle may be impacted if inflation pushes rates up.
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