Fixed Rates - Good Or Bad?
As we approach the end of the first quarter of this Financial year, inevitably speculation continues around cost of living and rising consumer prices, particularly when it comes to Electricity. Chances are if you’ve watched the news even once over the past month you will have seen a report on rising power prices. With so much uncertainty it can be difficult to budget effectively. One area you can do so is by Fixing your Home Loan rates, providing security for a certain period of time.
With interest rates sitting at record lows for some time now (fixed and variable rates are pretty much on par), a common question asked of me this year is whether they will remain the same, or finally start to move. This has led to much debate over fixing home loan rates whilst they are at their lowest point in decades.
Many have become caught up in media commentary about low rates and have rushed to fix their home loans, thinking it will surely save them interest in the long term. However, this isn’t always the case, and so here are the basic advantages and disadvantages fixed rates pose to the everyday home owner.
Obviously, the main advantage of a fixed rate home loan is certainty. Fixing your loan ensures your repayments do not change for a set period of time. You can budget with certainty for this period and maintain the standard of living you’re accustomed to. Fixing is great for those who don’t have huge piles of cash lying around at the end of each month, or much leeway with their income v expenses.
During times of very low interest rates, fixing your loan can definitely work well for you, because you can retain a low rate for a fixed term even if the rates rise steeply. Even though the RBA haven’t lifted the cash rate since November 2010, we have more recently seen Lenders independently lifting their rates. Gone are the days of rates rising only when the RBA lift the cash rate.
The main disadvantage of a fixed rate loan is that you won’t benefit from falling interest rates (should the Reserve Bank cut the cash rate again). You can miss out on the lower repayments that a variable rate can bring.
You are ordinarily fixed for a specific term, typically 2, 3 or 5 years, which means that you are locked in to that rate for this time frame. Say rates fall and you want to refinance, or your circumstances change and you look to sell your property, you’ll be charged accordingly for breaking your fixed agreement.
You’ll also be disadvantaged if you’re someone who likes to make regular extra repayments to your loan and retain a redraw facility. The majority of fixed rate products limit the amount of extra repayments you can make, and many don’t have a redraw facility. So, whilst you may have a lower rate, are you actually paying down the debt quicker than you would on a variable product?
Best of Both Worlds?
There’s nothing stopping you having a dollar each way – many mortgage holders are choosing to split their loan. Have a portion fixed, thus providing a level of security, and have the balance on a variable rate. This way you’ll still benefit should rates fall, and having a variable component to your loan will be able to make extra repayments whenever you want. It doesn’t have to be a 50/50 split, you can do whatever is best for your financial circumstances.
There’s no doubt a fixed rate loan offers both advantages and disadvantages, however it’s not a one size fits all scenario. What works for your best mate could be the polar opposite for you.
It’s important you speak with a Mortgage Broker to get a handle on what’s the best route for you. There are hundreds of loan products available, many that you won’t even know exist.
I meet with new and existing home owners each day to help them better understand the options available to them. Further, there is no cost to using a Broker.
Feel free to give Mike Wilson a call on 0435 945 419 or email firstname.lastname@example.org to learn more about the many different loan options available.