First published on May 3, 2016
This month, we held our first home loan seminar in our branches, covering a topic that is on everyone’s minds right now – to fix or not to fix their home loan. Interest rates are at historically low levels at the moment, so we are getting more and more customers enquiring about fixed rate loans. However, it’s really hard to give a definitive answer, as it relies so heavily on personal circumstances.
If you didn’t get a chance to attend our seminar, here’s a run down of what we shared.
Basically, the difference comes down to certainty v flexibility.
Fixed rates allow you to lock in an interest rate for 1, 2, 3, or 5 years. This means your repayments will also have a level of certainty. However, with limits on additional repayments currently set at $10,000 a year, fixed rates don’t provide the same level of flexibility as variable rate home loans. Variable rates provide more flexible features, such as unlimited additional repayments, a transactional offset account and the ability to redraw additional repayments. But, as the name suggests, the interest rate, along with your required repayment, may increase or decrease over time.
Take a look at your budget. If it is anything like mine, there are very few expenses that are within our control. Whether it is an increase in the cost of childcare, health insurance or just the cost of groceries, it always seems that I’m trying to get more and more from my budget.
Being able to lock in what is generally the biggest household expense, the mortgage repayment, provides some certainty and stability to household budgets.
Talk to five different people and chances are you will get five different opinions about the best time to fix you home loan. The truth is it really depends on individual circumstances.
My advice is to spend time looking at your budget and your lifestyle. Could you budge your budget if interest rates were to rise, or would a small increase in rate put you on the breadline? If so, you might prefer the certainty of a fixed rate loan. Are you considering selling your home anytime soon? Do you prefer to make lump sum payments off your mortgage? Are you planning renovations that might require you accessing a redraw facility? Then the flexibility of a variable rate could better meet your needs. By determining your goals, and discussing the different options with your lender, you should be able to find the option that best suits your personal situation.
If you lock in rates today and then rates increase, yes there is a possibility that you will save money. On the flip side, rates may fall further than their current low levels.
So while a fixed rate may save you money, the truth is that fixed rate loans are designed to provide certainty not savings.
You can get the best of both worlds and split your home loan. Part fixed to provide certainty, and part variable to cater to your need for flexibility.
And there is no need to do a 50/50 split. Take a realistic look at your budget and personal circumstances and leave what you realistically could pay off (with a buffer as variable) and the rest in fixed.
Talk to one of our expert lenders today!