We are often asked by clients, “Should I fix my interest rate?”
It’s a great question and one which is worth asking. However unfortunately there is no definitive, one size fits all answer to this particular enquiry. This is because it will always depend upon your current circumstances, budget, cash-flow, goals for the property (particularly during the fixed term period), how much flexibility you require in your loan and what you are aiming to achieve with your finances into the future.
On the other hand, if we look to the wider financial and economic environment, there are signs that interest rates may be on the rise in the near future. Firstly, in Australia we have had an unprecedented run of over 80 months straight without an interest rate hike.* In fact, the Reserve Bank of Australia (RBA) hasn’t increased rates since November 2010. Added to this, with the cash rate currently sitting at a record breaking low of just 1.5%, there is talk amongst respected economists that rates could rise within the next 6 months, and even as soon as early 2018. **
However, even with these conditions within the market place, no one knows for certain when and if rates will go up, unless they have access to a reliable a crystal ball. J So with this in mind, perhaps it is time to consider your options in regards to fixing your interest rate or staying with the variable rates available?
Below is a quick outline of some features of Fixed versus Variable Interest Rate Loans to help you to make an informed decision:
- Interest Rates - Fixed for the term of the loan, usually from 1 to 5 years. If interest rates rise, you benefit, however if they fall you don’t. At the end of the fixed period, you can re-fix, or roll it over into a variable loan. It’s important to note that the roll over variable rate is not usually the most competitive, so ensure you make arrangements to get a better rate.
- Flexibility- Once fixed, you can’t simply un-fix the rate during the period of the fixed term. So if you need to exit the loan early, there may be large penalties imposed by the bank, particularly if interest rates have moved upwards. Basically the lender will measure the economic cost of breaking the fixed contract and pass this on to you.
- Extra Repayments and Redraw- Apart from one or two lenders, fixed loans don’t usually allow extra payments to be made or restrict extra payments to a small yearly allowance. And if you do make extra payments, once the money is in the loan, you can’t access it until the fixed period expires.
- Best the Use When- You believe rates are going to rise and want to lock in a known interest rate before they do. When you are on a tight budget, don’t want to risk rising repayments, plus want the comfort of set repayments. Also, you know it will be unlikely for you to sell your property during the fixed rate period
- Interest Rates - These will rise and fall generally in line with the interest rate announcements of the RBA. If the rate falls you benefit, however if they rise then so will your interest rate and repayments. Lenders quote their Standard Variable Rate (SVR), however most of the variable loans we do are at a discount off this rate. So, don’t judge the lender by their published SVR, but rather by the rate of their specific loan products. Discounts can be from 0.5% upwards, which can make a big difference.
- Flexibility- A variable loan can be fixed at any time during the term of the loan. Apart from the cost of discharging the mortgage, around $350 for most lenders, there are no penalties for exiting the loan early.
- Extra Repayments and Redraw- Variable loans usually allow you to make extra payments into the loan. And any extra funds you pay into the loan are available to redraw. Because of this, it can be a great way to maximise the interest on your savings. Plus, you could pay the loan down, but not pay it out fully. This would give you easy access to redraw funds without going through a full loan application process again.
- Best the Use When- You believe interest rates will fall or stay stable and still want the freedom to make extra payments. When you have lump sum savings you can park inside the loan for some time. Or if you may wish to sell the property in the next few years.
As always, if you have questions or require further information, feel free to call us so you can speak with one of our experienced Mortgage Coaches. We’d love to hear from you.
Until next time,