Should I Fix My Home Loan?
Now this is a question I am asked almost daily in my line of work as a Mortgage Broker and
unfortunately there is no simple answer. With a second major bank this week announcing that they are increasing their fixed rates by up to 60 bases points, I thought it would be a good time to talk about this important topic.
Everyone has their own unique situation and the conversation I have with all of my clients is to help identify what is most important them and provide them with enough information for them to decide how they want their loan structured. The below are some of your most common options
Leave the loan all variable- Completely flexible, can make unlimited additional payments to your loan and have the flexibility to redraw this when you need to- Ability to link an offset account to potentially save on interest charged- Flexibility to refinance or sell your home without penalty down the track should your circumstances change- However the downfall with having your loan all variable is that you may experience rate fluctuation more than fixed rate loans which will impact your budgeting
Fix all of your loan- Fixed rate terms typically range from 1 - 5 years with different rates offered for each. It is not uncommon for a 5 year fixed rate to be lower than say a 2 year, it all depends on the banks funding costs- Fixed rates will help you budget for the term you decide to fix for. If you stress about what is going to happen with rates each time you turn on the TV and hear a story about rates going up then fixing your loan may give you some comfort of know your repayments- Some things to consider however, if you decide to sell or refinance your home within the fixed period you may be up for some penalties to break the fixed contract. This can only be determined by the bank at the time you decide to break the loan contract.- Offset accounts typically do not save as much interest as they do on a variable loan
Split your loan into fixed and variable- Enjoy the best of both worlds and almost hedge your bets, have the flexibility of variable and the certainty of fixed - Most common way to structure your loan if you want to fix- Link the offset account if you have one to the variable and you will potentially save on interest whilst still having some of your loan fixed- Splits are up to you, most people think it needs to be exactly half half but it can easily be $400,000 fixed for 3 years, and possibly $100,000 variable for the remainder. Its what works for you.
Some common scenarios I would get are...
Young Family - Strict Budget
Mr and Mrs Jones, a young family with a very tight budget. Possibility of more children down the track and increases to interest rates would have an impact to their lifestyle. The likelyhood of extra repayments over the next 3 years is very minimal. Mrs Jones also worries about rate rises from what she has been reading.
Solution: After discussing all of the Jones's need I presented them with some competitive 3 year fixed options in which they thought were the perfect solution based on their circumstances.
Mr Chan and his wife are both high net worth investors. Both are accountants with major firms on high incomes and live a comfortable lifestyle. Between them both they own 5 investment property. The have largely accumulated the property from purchasing in a low market, adding value to the homes and then have them re-valued to access the increased equity. They like the flexibility of doing this and not being tied to any specific lender to keep their options open. They also wanted the ability to possibly sell a home if it meant they got a good price. After speaking with them, flexibility seemed to be their most important need, together with interest saving features such as an offset account. Due to their high incomes, and negative gearing aspects of their investments, rate increases would not make a huge difference to their overall lifestyle, and having flexibility in their loans was much more important than securing a lower fixed rate.
Solution: We did a thorough needs analysis on the couple and presented a few solutions including combining some fixed with variable, however being in Accountants they had their numbers worked out and were comfortable variable rates would remain stable for now and so decided to keep all of the loans variable with the option to fix at a later stage.
Ultimately we all want to save on interest when paying off our home or investment. My opinion is that a loan designed to your unique circumstances will always work in your favor rather than going with a generic off the shelf home loan.
So there you have it.....if you do want to discuss how you should structure your loans I am more than happy to help guide you through what is important, simply pick up the phone or shoot me an email!