When I purchased my first home... Part 4: fixing your home loan
The best time to fix your home loan is at the bottom of the interest rate cycle (obviously) or if the outlook is for rates to rise.
For example, right now, fixed rates are as low as 0.5% below the variable rates on offer from the major banks.
The reserve bank has left variable rates on hold for a while now and even when they reduced rates recently, the major banks left the variable rates unchanged.
Whenever a client is looking for a loan, we discuss fixed-rate options as follows:
1. How long do they plan on holding that property?
2. Are they looking to make additional repayments (as most lenders limit fixed overpayments to $10,000 per year) and you can't get those overpayments back until the fixed term ends?
3. Are they expecting any large sums of money such as inheritance, sale of asset or bonus/commission income, which would trigger me to look at keeping a portion of the loan variable?
4. Have they borrowed right at the limit of their borrowing capacity - in other words, will they be uncomfortable in the rates increased?
5. What is the economic outlook and what is the difference in rates between fixed and variable?
Once we have that information, we can explain some options and whether a fixed-rate loan is appropriate or perhaps part fixed and variable.
A simple question I ask clients when deciding on a fixed rate is: how much extra could you pay off the loan in the next 2-3 years? We then leave at least that amount on a variable loan and consider fixing the rest.
What I did with my own home loan
When I first took out a loan in 2008, I left it all variable as at the time, there was not much difference between fixed and variable.
During the global financial crisis, when interest rates reduced significantly, I took advantage of a 2 year fixed rate, fixing 80% of my home loan and kept the remaining portion variable with an offset account to keep any savings, which saved me a lot of money in interest.
At the end of that 2-year fixed term, I fixed it again for a further 3 years and to be honest, looking back now, I should have only gone for another 2 years as I think the 3-year term was too long and the rate whilst good at the time ended up higher than variable rates.
In my mind, the circumstances have to make sense (answering those 5 questions above) to make the best decision on fixing.
Fixed rates or 2 or 3 years are the most popular and I don't often recommend a 5 year fixed rate.
If you would like to talk through the above rationale or your own circumstances please let me know.