That is the question. As we are in a record low interest rate environment, many home loan borrowers are considering whether or not to fix the rate on the total amount owing on their mortgage.
Whilst there are lenders offering some very attractive rates on fixed loans, the following should be considered before obtaining a new loan, or changing an existing loan to a fixed rate:
- Many fixed rate home loan products will limit the extra repayments which can be made in addition to the minimum owing. Depending on the product, this could be on an annual basis, or for the fixed rate period selected. The additional repayments could be capped on a percentage basis, or a dollar basis for each year, or the entire fixed rate period without penalty. If you exceed the additional repayment cap, you could be penalised. If your objective is to accelerate the repayments on your home loan, fixing the total loan amount may not be your preferred option.
- If the lender decreases their variable rate and your fixed rate is higher, your repayments will not reduce.
- Fixed rate loans may be less flexible, and offer less features such as redraws or offset accounts.
- If your circumstances change, and you need to switch to a different product, or if you wish to repay earlier than the fixed rate term, the lender may charge you with a break cost. The break cost is typically calculated to compensate the lender for the loss in profit that has been factored into the fixed rate period.
- When the fixed rate period expires, the loan may revert to a much higher variable rate.
A common strategy to reduce the impact of the above disadvantages with fixed rate loans is to ‘split’ your home loan by making it part fixed and part variable. The fixed component of your loan will provide the ability to budget for the repayments over the fixed rate period. The fixed portion of the loan will mitigate the risk of future interest rate increases, and ensure your repayments are set over the fixed rate period. The remainder of the loan balance can be held at a variable rate so you can make unlimited repayments, and enjoy the benefits of access to redraws, and a linked offset account.
When obtaining a new loan or refinancing an existing loan, there are several options to consider.
Please not this article provides general advice only and has not taken your personal or financial needs into consideration. If you would like more tailored mortgage or financial advice, please contact us today for a confidential, cost and obligation free discussion.