Thousands of home owners and investors are now asking themselves the same question: should I fix my interest rate? It’s not surprising considering the unpredictability of the market now.
Because, whereas lenders traditionally took their cue from the Reserve Bank’s first-Tuesday-of-the-month announcement on rates and adjusted their own interest rates accordingly, the Big 4 and many other lenders are now increasing their rates out of the usual cycle. And that’s made a lot of borrowers currently on variable rates jittery, wondering just how high their repayments might go.
Of course, there isn’t a blanket ‘yes’ or ‘no’ answer to the fixed rate question, because your situation is different to that of your neighbor, your in-laws, and your work mate. Which is why it pays to think about how a fixed loan rate would suit your circumstances. So here are a few ideas to ponder before you talk things over with your bank or a reputable finance broker.
PROS OF FIXED RATES
1.Stability for single-income households or tight budgets
You aren’t flush with cash, or don’t have a second wage to cover unexpected spends, so you really need to be sure you can make your repayments, put food on the table each week and maybe even afford a bit of r’n’r. Having a fixed rate is reassurance you will always be able to pay the mortgage or investment loan. And if you do score an unexpected pay rise, that’s even better!
2.Peace of mind for those who like certainty
Even those who are quite comfortable financially may prefer a ‘set-and-forget-for-a-while’ loan. For those who like a clear and consistent budget, with all outgoing and incoming funds accounted for, the fixed rate is a safe option.
3.Might save you money in the long term
Sometimes, it is possible to get a fixed rate lower than variable rates, although that would be unlikely in the 2017 market. Sometimes, a fixed rate can save you money if variable rates rise above your rate. But there are no guarantees.
CONS OF FIXED RATES
1.Cost for early payout
Let’s say you come into a windfall, and want to pay out the loan early. Many lenders will charge you a penalty fee (called an ‘economic cost’) which could run into thousands of dollars. The amount depends on the size of your loan and where current fixed rates site in comparison to your rate.
Most lenders have strict policies about how fixed loans are repaid – usually a maximum additional amount can be repaid each year. So, just because you do get that pay rise or your partner gets a job and you can afford to start paying extra each week, you may not be able to. Lenders usually cap the amount you can repay each week as additional payments, and often have limits for lump-sum repayments too.
3.No redraw option?
If you have managed to get ahead with your repayments (see 2 above) and have a buffer on your repayments, you may not be able to access the extra cash when you need it. With variable loans you can usually pay off as much as you like and then redraw those advance payments in a lump sum. The ability to stash extra money in when you have it (say when you’re on two incomes) and then get it back when you need it (for school fees, holidays or health emergencies) may not always be an option with fixed rates.
4. No offset facility?
Some people don’t want to put all their surplus cash into a loan. So, they choose a handy arrangement called an Offset Facility, which reduces the interest charged on a loan. It’s a good facility for some borrowers. But, if you’re on a fixed loan, in many cases you won’t get the option to have one.
If you are considering a fixed loan rate, try to make sure you will go the distance. Make sure you won’t want to sell your property or pay out the loan before its term is up. There’s no point taking a five-year fixed rate, if you want to upsize or downsize in three.
AND ANOTHER THOUGHT TO CONSIDER…
For many long-term borrowers who want to adjust their payments, use redraw, offsets or put in lump sums, it may be worth looking at a little of both, taking on a loan that’s part fixed and part variable.