When there’s any movement to interest rates, mortgage holders start to consider fixing their home loan rate as an insurance policy against future rate rises.
Fixing your home loan rate may be smart when you consider where rates are at today, however your decision should be based on strategy and forward planning as opposed to speculation.
Fixing can also have consequences!
So how do you decide on what’s right for you? And what do you need to consider to ensure you make an informed decision?
A fixed rate home loan has the advantage of “set” repayments for a predetermined period (i.e. the fixed term) which is an excellent strategy if you want certainty with your cash flow commitments. However there are also disadvantages which you need to be aware of before you make a fixed decision.
Here is my 7 step checklist I use when advising clients on whether to fix or not:
1. How likely are you to sell your property during the fixed term?
Breaking a fixed rate home loan can be costly, it all depends on the direction interest rates move.
For example, if you fix today and the variable rate is lower than the rate you fixed at when you sell the property, the break cost can be significant as the bank/lender will pass on the economic cost to you.
2. How likely are you to access equity for home improvements and renovations?
3. Do you want to leverage the equity in your home to invest in another property in order to create more wealth?
Equity release for investment purposes can be difficult with some lenders, and again if you are forced to break the fixed term to refinance to a friendlier lender, then the break cost can be significant.
4. Do you plan to make extra repayments during the fixed term?
Most lenders that offer fixed rate home loans limit the amount of extra repayments that you can make.
Once you go over the maximum repayment amount, you can be penalised as you will be in breach of the terms of the mortgage.
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This removes the flexibility of making extra repayments which ultimately saves you on loan interest.
5. Do you plan to transact via your home loan and redraw your additional repayments?
Most lenders won’t allow you to redraw your extra repayments until the fixed rate term has expired.
This removes flexibility of accessing your additional repayments forcing you to source the money from other sources, which may be a hassle and costly.
6. Do you have a higher than average household income and require flexibility with your home loan?
A fixed rate home loan is an insurance policy against rate rises, but it can also remove flexibility and control over your cash flow.
A couple of lenders allow a 100% offset account against a fixed rate mortgage, however this is the exception and not the rule.
7. Do you want to buy more properties and continue to leverage your growing equity to create more wealth?
A fixed rate loan can tie you to the one lender during the fixed term as the break cost may be too significant to switch lenders.
This may cost you in lost opportunity and restrict you from buying more property.
There are other issues to consider, however the above 7 step checklist is what I use when advising clients, as it covers the main issues when considering a fixed rate home loan.
Fixing your rate has the ultimate benefit of achieving “certainty” with your mortgage repayments, however breaking a fixed rate loan can be costly as well as removing flexibility and control.
Of course there is the option to apply for a split loan – part fixed part variable – however the same issues apply if you need to exit from your lender as the fixed portion of your home loan restrricts you.
Speculating on rate movements is fraught with danger and making a fixed versus variable decision for the wrong reasons can be costly.