“Fixing” your home loan means you lock-in the interest rate for a set period of time.
Most people look at fixing in completely the wrong way – if your motivation is to gamble on future interest rate movements in the hope your fixed loan will be cheaper, that’s not what it’s really about.
Fixing is about reducing uncertainty and also a form of risk management for your cash flow. How would you feel if you’d locked in a rate for 3 years and interest rates dropped further? You need to know that you would feel comfortable that you had secured your cash flow position and not get stressed because rates went against you.
Whether fixing is the right option depends on your personal situation. You need to weigh up both the benefits and risks:
- Assurance of knowing exactly what your repayments will be and therefore giving you the confidence to budget accurately and plan your finances
- This provides Certainty. If you consider yourself to be in a time of uncertainty in terms of employment, living arrangements or family fixing may not be the best option for you right now.
- Option to Split the loan. You don’t have to fix the full loan amount, just a portion of it, e.g. 50% fixed and 50% variable. Investors should consider what balance of fixed and variable rates they need for their portfolio. Usually first time investors choose to lock in 50% of their loans, while investors with larger portfolios protect themselves by fixing a larger percentage of their loans.
- Option to make Interest only repayments and pay Interest in advance. These options are often attractive to investors. However, with interest rates at record lows it is a great time to consider a fixed rate loan with P&I repayments (as these loans are currently cheaper than interest only). The best option for you depends on your individual situation and long term wealth strategy.
- Early repayment penalties if you break the fixed term. Things don’t always go according to plan – is it possible that you will be looking to upgrade the family home anytime soon? Maybe work or family commitments might change which would mean a change of location?
- No Increase to the loan amount is allowed. An increase would be a break to the fixed contract – are you considering renovations to your current property in the short term? Do you want to access equity for an investment property deposit?
- Extra repayments are usually only allowed to a maximum amount. Making extra repayments saves a lot of interest over the long term so it’s a great feature to have.
- Offset accounts are generally not available. However there are some lenders who offer full or partial offset accounts on fixed loans. A mortgage broker can save you time and effort and tell you which ones these are!
- Redraw is generally not available.
- Fees and charges, e.g. establishment fees and ongoing fees. You need to consider the costs of making the switch to fixed to see if it is worthwhile to change loan products.
Are you considering fixing mainly because you want to make sure you are receiving the best deal available on your home loan? If so, get in touch with Luxe Financial for a FREE home loan review.
This is general advice only. Your full financial situation would need to be reviewed prior to recommendation of any offer or product.