Will interest rates drop again? Will they remain the same for quite some time? Or will they go up? To fix or not to fix is the question!
The decision to fix a home loan or keep it variable is very difficult for some. Both have their advantages and disadvantages and need to be considered carefully. Interest rates are at historical lows and fixed rates remain lower than the average standard variable rate, so, is now the time to fix or not? If you decide to fix, make sure you are fixing for all the right reasons not just the lure of a cheap rate. Be fully informed of the implications of locking into a fixed rate as you don’t want to later regret your decision if variable rates drop, which seems unlikely at this point, or your personal situation changes where it is necessary to revise your financial situation.
Your financial situation and personal preferences should always be the guiding factors in whether to choose a fixed or variable home loan. Both loan types have their pros and cons so talk to us for the best advice about what product suits your budget and lifestyle.
The insurance of fixing:
Choosing a fixed loan is similar to buying an insurance policy; it gives you certainty over a period of time. A fixed rate can be a good option if you are on a tight budget because it allows you to know exactly how much each repayment will be, irrespective of interest rate movements. This also, however, means that when interest rates drop below the interest rate at which you’ve fixed your loan, your repayments would be higher than they would be if you had a variable rate loan.
One of the downsides of fixing is that many fixed loans charge for extra repayments and heavy fees associated with an early payout. Despite the banning of mortgage exit fees on variable rate loans in July 2011 borrowers still get stung with large fees on fixed rate home loans if they choose to exit early. Seek advice before you sign the contract on how any exit fees are calculated in case you have to sell or refinance within the set term. The longer the set rate period you have in place the higher the cost associated fees because the re-financer has to compensate themselves for the loss of re-lending the money at a lower rate.
The ups and downs of variables:
Variable loans have more features and greater flexibility than fixed loans but as the rate fluctuates according to various market conditions they can be risky if you’ve overcapitalised on your loan. With a variable rate home loan, your repayments will reduce when interest rates go down. Alternatively, you may be able to keep your monthly repayments the same, helping you pay off your loan sooner, and saving money over the life of the loan.
If your variable rate falls, you may be making lower repayments than if you had fixed your rate but if the variable rate rises, your monthly repayments increase. When choosing a variable it’s important to plan for the possibility of rate rises and be able to adjust your budget accordingly.
Split rate and capped loans are hybrids between fixed and variable loans.
Split rate loans allow you to divide your loan between fixed and variable interest rates, which gives you a foot in both camps.
Capped loans are often offered as honeymoon or introductory loans and under this type of loan the interest rate is fixed for the capped period. During this period, the interest rate cannot go higher but it may go lower if the lender’s standard variable interest rate falls below the capped rate.
Fixed or variable home loan checklist:
Some things worth considering when deciding whether to fix, split or have a variable loan:
- Do you want the certainty of predictable repayment amounts?
- Do you anticipate any major changes to your family arrangements, your job or your business?
- Are you thinking of selling your property in the near future?
- Are you thinking of buying an investment property?
- Do you anticipate you will want to make additional repayments on top of your monthly repayments?
The answers to these questions will help you to think about what is the most suitable option for you. Don’t hesitate to talk with us regarding which option would best suit your personal situation.