Should I stay with a Fixed loan – or go Variable?
One of the most common questions we get asked is the question of fixed rates vs variable rates and which is better….. There is no simple answer – and that’s simply because it all comes down to what your intentions are and most people’s intentions differ when it comes to managing their money. Fixed loans are very appealing as they generally are offered to borrowers at a lower interest rate than variable loans, yet there are some limitations. Variable loans offer greater flexibility in terms of making additional repayments to pay off your overall debt however you are at the mercy of market and lender-imposed rate fluctuations. It really does come down to your personal circumstance and financial priorities.
Let us explain through this example:
Borrower A purchased an investment property two years ago. They released equity from their owner-occupied property to assist with the purchase. As this was an investment purchase, the decision was made to ‘fix’ the interest for 3 years and re-evaluate at maturity of the fixed term. The fixed rate at the time was 4.09% with the chosen lender. Fast forward a couple of years, fixed rates have come down to mid 2%’s and Borrower A is asked to consider breaking their current fixed loan arrangement and re-fix at a lower rate by a Bank branch employee. This sounded appealing to Borrower A in the first instance, as saving money on his loan was a priority.
Thankfully, Borrower A called his broker first – as the loan was an investment loan, there was no need to consider breaking and re-fixing simply because the interest payable is tax deductable, and as the rental income was sufficient to cover the repayments in this case, there was no financial impact on the borrower. All they would have achieved in breaking and re-fixing was trigger a few thousand dollars in break costs which the proposed savings made by switching to the lower rate would not have off-set. Plus, the tax deductable component would have then become smaller due to the lower rate and for Borrower A, this was critical, as maximising his investment to enhance his tax position was the main priority. So, all in all, not the best idea to switch.
Borrower B has an owner-occupied loan and would like to take advantage of current very low fixed interest rates as well as make as many additional repayments as viable, yet knows most lenders will only allow up to $10k per annum in additional repayments on fixed loans without triggering break costs or penalties. So, the common solution would be to fix part of the loan and have the balance on a variable arrangement, in the hope that variable interest rates could drop and have no cap on additional repayments. However, there would always be the risk that variable rates would not drop further and instead, rise.
It could be more advantageous to instead split the loan into two or more fixed rate accounts, allowing up to $10k in extra repayments per split thus making the most of very low fixed rates and being able to dramatically reduce the loan balance across the entire loan without penalty. Great idea!
The decision to fix or remain variable is really dependant on your individual circumstances, this is where the experience of a professional Broker can help you structure your home loans in the most cost-effective way to take advantage of current lending environment and reduce your financial exposure for your benefit, and not the lenders. So, in our opinion, yes, take advantage of the current environment of lowest fixed rates ever experienced in Australia and make it work for you by getting your broker involved early.
After much media talk these past weeks that the RBA will reduce cash rate in October, they did in fact hold rates as they are which was no surprise, The general consensus remains that many first-time buyers entering the market during this period do so with some incredible financial incentives from the current government. So, if you are ready to get started with your home loan application, I am available on 0438 041 111 or on email at email@example.com for a confidential discussion.
Please enjoy our articles this month … riveting reading for all!
As always, enjoy life, work hard, play safe and remember that we are always here to help you
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All the best
Peter Vinci - 0438 041 111