Rising interest rates
Rates might be going up but don't panic!
In the last week, most major Australian lenders [and some smaller ones] have started moving both variable and fixed rates. Some lenders are only moving their investment products whilst others are only moving their fixed products.
There are differing reasons from the banks but the general theme is that the cost of funding is increasing meaning their margins are being squeezed.
Should consumers think about fixing their loan?
Some of the pros:
- Certainty of repayments & interest rate.
- Freeing up cash-flow as in some cases they are lower than variable products.
Some of the cons:
- Break costs apply if you break the loan within the fixed term.
- Additional repayments on the loan are capped between $5-$10k per annum.
Having a strategy will be the most important aspect. Here are some scenarios for consumers to consider:
- How much (in additional repayments) can I make in a year?
- What do the next 2-3 years look like?
- Would I benefit by fixing part of my loan and keeping some variable so I can pay it down?
- Do I want to free cash-flow to either pay down my loan via my offset or to purchase another investment property?
- Do I plan to sell my house within the next couple of years.
Having a clear understanding of the above can help answer questions around whether or not it is a good time to fix and if there are any advantages in taking a fixed option and if so, which option will be most suitable.
A fixed rate option is not so much about trying to predict the market direction but instead attaining certainty around repayments for a couple of years. Of course we all want to save as much money as we can but it is important in this instance to be proactive rather than re-active. This way no matter what is to happen, consumers will not be affected during the fixed rate period.