To Fix or Not to Fix: 6 Considerations
Fixed rate versus variable is one of the most basic decisions you’ll need to make when it comes to a loan. With so much information circling about these options, it can be hard to cut through the crap and know what to pay attention to.
Current interest rates are at record lows and many economists believe we are getting to the bottom of the low interest rate cycle. If that were the case, fixing your loan would make logical sense. Keep in mind though, when these people provide general advice, they’re not considering your specific goals and property plans. It isn’t tailored to your situation. We want to help you make an informed decision by understanding what fixed versus variable loans mean.
Think of a fixed rate loan like betting against the bank. If you get the timing right and lock away a fixed rate and interest rates start increasing, you win and bank loses. Conversely, if you fixed your loan and interest rates drop further, the bank wins by making a higher margin on your loan.
Here are our 6 factors to consider…
- Why fix a loan? Fixing your loan gives you certainty of repayments. This could be beneficial if you are considering starting a family and the household income may reduce. It is also can also work in your favour if you’re an investor wanting to lock your interest repayments in for a fixed period.
- Restrictions. When your loan is fixed, the bank will place restrictions on your ability to make additional repayments against the loan. Generally, you can’t make more than $10,000 per annum of additional repayments against a fixed rate loan. If you have a plan to aggressively pay down your home loan over a 5-year period, then a fixed rate home loan would not be suitable for you.
- To combat the restrictions, we would generally recommend our clients to not fixed the entire loan. You can have a portion of your loan fixed and a portion of your loan on a variable interest rate. This way, you get the best of both worlds by making your additional repayments into the variable part of the loan. How much you fix and how much variable will depend on your plan with your loan.
- How much? The biggest deterrent for a fixed rate loan is break costs. If you decide to sell your property during the fixed rate period and the bank is winning on your fixed rate, your break costs could be very expensive. So, if you think it’s possible you may sell your property during the fixed period, then a fixed rate loan may not be the way to go.
- If you do have to sell your property for an unforeseen reason, the bank does have a portability option with most fixed rate loans. Providing certain criteria are met, we can move your fixed rate loan onto your new property and avoid the break costs for paying out early.
- Interest rate movements are beyond our control. They are impacted by cost of funds for banks, competition, domestic economic settings, political issues and global market impacts. Getting the timing right can be hard, but you need to keep your eye on the market and make the best decision for your own situation.
This list is just the starting point for a discussion. Do your research and get to know the ins and outs. Our ears are always ready to listen if you want to chat about this topic, or anything loan related.
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