When interest rates start to fluctuate, homeowners often contemplate fixing their home loan rate as a safeguard against future rate increases. While fixing your home loan rate might seem like a prudent move in a rising market, it’s crucial to base your decision on strategy and forward planning rather than market speculation.
Why is this important?
Although fixing your rate may offer a sense of security, it can also have potential drawbacks. So, how do you determine what’s best for you? What factors should you consider to ensure an informed decision?
A fixed rate home loan provides the advantage of predictable repayments over a predetermined period (the fixed term), which is an excellent approach if you seek certainty in your cash flow commitments. However, it’s important to be aware of the disadvantages associated with fixed rates before making a decision.
Here is a 7-step checklist to assess whether fixing their rate is the right choice:
1. Consider the likelihood of selling your property during the fixed term.
Breaking a fixed rate home loan can be costly, depending on the direction in which interest rates move. For instance, if you fix your rate today and the variable rate is lower than the rate you fixed when you sell the property, the break cost can be significant as the lender passes on the economic cost to you.
2. Assess the probability of accessing equity for home improvements and renovations.
If the lender you choose for your fixed-rate mortgage lacks flexibility in releasing equity, you might incur expenses when transitioning to a lender that allows equity release.
Determine whether you intend to leverage the equity in your home for investing in another property.
Some lenders make it challenging to release equity for investment purposes. If breaking the fixed term becomes necessary to refinance with a more accommodating lender, the associated break cost can be substantial. This could result in missed opportunities and limitations on further property acquisit3.ions.
3. Consider your plans for making extra repayments during the fixed term.
Most lenders offering fixed rate home loans impose limits on the amount of extra repayments you can make. Going beyond the maximum repayment amount may result in penalties as you would breach the mortgage terms. This restricts the flexibility of making additional repayments, which can save you on loan interest in the long run.
4. Evaluate whether you intend to redraw your additional repayments in case of financial constraints or unexpected circumstances.
Most lenders do not permit redraw of extra repayments until the fixed rate term has expired. This lack of flexibility means you cannot access your additional repayments when needed, forcing you to seek additional funds from alternative sources. Again, this can be inconvenient and costly.
5. Assess whether you have a high household income to offset your mortgage debt.
A fixed rate home loan provides insurance against rate rises but can limit flexibility and control over cash flow. Only a few lenders allow a 100% offset account with a fixed rate mortgage, which is the exception rather than the norm. If you possess cash reserves and regular savings, you may miss out on the opportunity to offset this surplus cash against your mortgage.
6. Consider the stability of your relationship.
Separation can already bring about difficulties and expenses. If you and your partner have a fixed loan together and your relationship is on uncertain ground, break costs would be an additional expense to deal with. If your relationship is unlikely to last throughout the fixed term, fixing the rate may not be the best option for you.
Please rest assured that all our conversations are strictly confidential. Feel free to share your future plans so that we can assist you in making the most appropriate decision based on your unique circumstances.
While there may be other factors to consider, the above 7-step checklist covers the key considerations when contemplating a fixed rate home loan. Fixing your rate provides the ultimate benefit of achieving payment certainty, but breaking a fixed rate loan can be costly and limit flexibility and control.
Of course, you also have the option of applying for a split loan, with part of it fixed and part variable. However, the same issues apply if you need to switch lenders, as the fixed portion of your home loan restricts your flexibility.
Speculating on rate movements carries risks, and making a fixed versus variable decision for the wrong reasons can result in expenses. Fixing your rate can indeed be the right decision, provided it is based on the appropriate strategy.
Ready to make an informed decision about your home loan? Talk to our experts today to discuss your unique circumstances and find the best solution for your needs. Our experienced team is here to provide guidance and assist you in navigating the complexities of refinancing, buying a property, property investment, loans, and mortgage broking. Don’t hesitate to reach out and take control of your financial future.