This is always a hot topic in the mortgage market, especially when rates are going through a period of adjustment.
When considering fixing your loan, you should consider a number of factors to determine if it is appropriate for your circumstances.
1. What is your affordability? If home loan rates went up tomorrow, would this put stress on your budget and make it hard to meet your monthly commitments? If so, this could be an indication that a fixed home loan rate may be suitable. The way to look at it is simple; if rates went down, yes – you’d save for sure – but if they went up you could be in an undesirable situation, at risk falling behind on your mortgage repayments, and even losing your valuable home. What is more important in this situation – waiting to see if you can save, or ensuring the future sustainability on your house hold budget?
2. Which direction do you believe home loan rates are going? If only I had a crystal ball – I’d be the most popular mortgage broker in the country! Banks and mortgage lenders alike have a large team behind them, including experts that review where they believe interest rates are going to go in both the short and long term. For example, if a mortgage lender sets their 2 year fixed rate lower than their variable rate, what does that suggest? I could be an indication that the lender believes that the variable rate will drop below fixed rate before the 2 years is up – meaning long term they’re still winning out. Likewise, if they set their 5 year fixed rate higher – it could suggest that they are expecting the rates will be back on an upward swing before the 5 year period is over. It’s not the only factor to consider, but should give you some forethought into where you think rates will go, or at least where the banks think rates may go!
3. Can I make extra repayments? Even though your home loan is on a fixed rate, it is still possible to make additional repayments. Each lender has very different allowances in this space. Some lenders allow a set limit per year of say, $5,000 – $10,000 – others will have a set limit over the life of the fixed rate home loan. Meaning that if the limit repayable over a 3 year fixed rate home loan is $10,000, you are restricted to just over $3,000 per year on average. It is important to make sure you do not go over this threshold – by going over this you could be in breach of your fixed rate contract and liable for fees or fixed rate break costs. See the lenders fixed rate terms and condition for more information or ask your mortgage broker before applying.
4. Are you planning to make any changes to your home loan or home in the near future? Whilst fixing your home loan can be a great way to provide some certainty over your repayments and your budget, they can be costly to break. So, if you are thinking you might want to sell your home, upgrade your home, use the equity for an investment purchase, or any other possible changes – then you need to really consider if a fixed rate home loan could prevent you from achieving your goals. For example; if you’ve fixed for three years, but want to sell and upgrade in twelve months, you could find yourself in a very expensive situation. Or; if you decide to use the equity in your current home to purchase a new home or investment property and your current lender is unable to assist, the fixed rate break costs could prevent you from looking at alternative lenders to assist with your plans. Always let your mortgage broker know what you future plans are so they can take this into consideration.
5. Fixed rate break costs! Whilst large lender exit fees may be banned in Australia, these are not the same as fixed rate break costs. With a fixed rate loan you have signed a contract with the lender confirming you will remain with them, on a set rate, for a set period of time. If you break this agreement, the lender has the right – and will – charge fixed rate break costs. They don’t give out the exact method of calculation, but it is roughly based on what they are losing in order to let your contract go and relend those funds elsewhere – this, mixed in with the lenders whole sale rates, works out their loss by releasing you from the fixed rate agreement and they will on charge this cost to you. It could be in the 10’s of thousands, or it could be less. I’ve see fixed rate break quotes anywhere from $150, to $2,000 right up to $15,000-$20,000. Whilst this may seem high, remember this only becomes an issue if you decide to break the fixed rate agreement and most people will stick with their fixed rate loan for the duration of their agreement.
So to wrap things up, the only person that can decide if a fixed rate if you for, is you! As a mortgage broker, we can certainly give you the facts on fixed rate home loans, and help you understand what it all means. But ultimately you need to ensure you are comfortable with your decision, and that it will have minimal impact on your future plans. One last thing to remember, you can always fix your home loan later if you feel interest rates are changing – but it’s a lot hard to change a fixed rate loan back to variable. If you are unsure, you don’t have to make the decision straight away and can review fixing again in the future.
Regards, Daniel Reid – Director, Emanate Finance