November 21, 2013
A lot of people ask whether they should lock in a fixed rate on their home loan. Right now the 1 and 2 year fixed rates are very low and it is smart to consider the pros and cons of variable rates versus fixed over that timeframe.
Which way will interest rates go?
There is plenty of speculation in the media that interest rates will rise at some stage, however the reality is that nobody can predict how much, when or even which direction rates will move. The banks have started to increase 2 year to 5 year fixed rates, so that gives you an indication of what they think will happen in the longer term.
Variable rate loans
These are great when interest rates go down, as you get the benefit of lower interest charges. Depending on your circumstances, these sort of loans can be flexible to suit you with offset accounts, redraw and lower switching/exit costs.
Of course, if official interest rates go up, the bank will pass those extra costs on to you (along with any other increase they choose to pass on).
Fixed rate loans
These are good when you want certainty about repayments for a period of time. You will pay the same amount during the fixed rate period, even when official interest rates go up.
Right now you can get 1 and 2 year fixed rates that are lower than most variable rates. These rates look good, but be aware that if you lock them in now, there is no guarantee that variable rates won’t fall even further.
Most fixed rate loans have little or no flexibility when it comes to offset accounts, redraw and switching. If you want to exit before the fixed period is up (say you need to sell the property) then there can be significant costs to do so.
Split your home loan
One way you can get the best of both worlds is to split your home loan so that some is on a variable rate and some is fixed. That way you can take advantage of the benefits that a fixed rate loan offers, but not put all of your eggs in the one basket.
Plenty of lenders will let you choose how much of your overall loan you want to put on a fixed rate. At Mortgage Choice we have access to over 20 lenders and can help work out what is best for you.
If you would like to know more, contact Craig at firstname.lastname@example.org or call on 0411 782 440.