December 19, 2013
Should you fix your home loan? Interest rates, both variable and fixed, are at historically low levels. Many clients have contacted us about their best option, so here are my thoughts on the pros and cons. This blog entry should be taken as general information only because there are numerous ‘exceptions to the rule’ among the hundreds of loans we have to offer, and these points don’t take your circumstances into account.
Variable Interest Rate Loans
- Suit a borrower who is prepared to increase repayments if interest rates rise, in exchange for having the most flexible loan type.
- Minimum repayments can rise (and fall) during the life of the loan, at any time the lender chooses to change interest rates. This most often follows changes in official interest rates set by the Reserve Bank of Australia (RBA) on the first Tuesday of each month.
- Additional repayments can be made without penalty.
- Have a redraw facility to take out any extra repayments that may have been made.
- May include an offset account as well as the redraw facility.
- Full repayment (including a loan refinance) incurs an administrative fee, typically between $250-$500. Note that "early exit fees" on new loans were banned on 1 July 2011.
Fixed Interest Rate Loans
- Suit a borrower wanting some budget certainty, in exchange for losing flexibility to make extra repayments.
- Minimum repayments do not change if official interest rates change. They won't change until the end of the 'fixed rate' period, between 1 and 5 years. At the end of the fixed rate period borrowers can choose to fix the loan again for another period, at a new rate, or let the loan convert to a variable interest rate for the remaining term of the loan.
- The rate on a fixed loan may not be confirmed until the loan is drawn down (settles), leaving borrowers at the risk of a sudden rise when it is too late. Many lenders offer an option to ‘lock in’ the rate for a fee.
- Additional repayments may not be allowed or may incur a penalty.
- Redraw and offset facilities are rarely available.
- Full repayment (including a loan refinance) in the first few years may incur substantial 'break costs' in addition to an administrative fee.
Split Rate Loans
- Suits a borrower wanting the best of both worlds – flexibility to make additional repayments, redraw and use an offset account, with the budget certainty from having part of the loan on a fixed rate loan.
- A split rate loan has two loan accounts. One account has a fixed interest rate and the other has a variable interest rate. The borrower selects how much to allocate to each.
The Bottom Line Is....
- The majority of Australians continue to choose (all) variable loans because they feel comfortable their budget can cope with some unpredictability in their loan repayments.
- My advice is to weigh up the flexibility in your budget (variable) with your need to ‘sleep easily’ (fixed). Try to avoid decisions based on predictions about the cheapest option over the next few years.
- If you choose to split, ensure the variable account is large enough to give you all the flexibility you need over the next few years while you have an (inflexible) fixed rate account.
- Avoid taking any fixed rate if you are likely to close the loan during the fixed period, to minimise the risk of incurring ‘break costs’.
Why you need to call us
You need to call us because your decision can be guided by our expert advice on:
- The ‘exceptions to the rule’ such as fixed rate loans with offset accounts.
- The significant differences in rates across more than 20 lenders.
- How to ‘lock in’ a fixed rate before it is drawn down.
- Loan proportions if you are considering splitting your loan.
- Arranging changes for you even if you did not have your current loan arranged by us.