Opting for a Fixed Rate Mortgage

September 11, 2017
Raymond Teh

https://www.domain.com.au/news/on-the-rise-more-nsw-home-owners-opt-for-fixed-over-varied-rate-home-loans-20170903-gya34q/?benref=smh

The Domain article narrates about more borrowers in NSW opting for a fixed rate mortgage in 2017. I will provide further elaboration. A fixed rate mortgage should be selected for repayment certainty. Avoid selecting a fixed rate product over a variable mortgage on the expectation that it will be cheaper. Whilst interest rate may be on the rise for some borrowers*, many borrowers electing fixed rate loans from 2012 to early 2016 eventually paid more than if a variable mortgage was selected in the beginning.

If repayment certainty is a priority, split the mortgage into a variable and fixed component for your owner occupied mortgage. The limitation on taking up a fixed rate mortgage in its entirety includes:

• A cap on additional repayment of $5,000 - $15,000 per annum above the minimum instalment by most lenders

• No redraw facility. With a majority of lenders, additional funds deposited in the mortgage account cannot be withdrawn during the fixed rate term

• 100% offset facility is not offered for a fixed rate. Some lenders may offer a partial offset facility on the fixed rate loan. This provides between 0.70% - 2.00% of benefit, a marketing gimmick basically

• After the fixed rate term ends, it automatically reverts to a standard variable loan with less discount than if a standard variable loan was opted in the beginning

The split between fixed and variable mortgage products should be determined by your ability to deposit extra funds in the offset account during the fixed rate term. Assuming a three year fixed rate is elected and up to $100,000 in additional repayment over three years can be deposited into the offset account, split the mortgage into 3 years fixed with $100,000 loan on a standard variable product.

Do not take up a fixed rate if there are plans to sell the property during the fixed rate term. Break costs may apply.

*

Over the preceding 12 months, variable rate investment loans and all loans on interest-only repayment has risen by 0.50% - 1.00%. In general, an owner occupied loan on principal & interest repayment has not risen.

Posted in: Interest rates

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