As a mortgage broker one of the most common questions I receive from clients is whether they should fix the interest rate on their Home Loan. Because rates are at historic lows borrowers are looking to take advantage of this by locking in a rate for a period of time, usually between 1 and 5 years.
Lenders are currently offering fixed rates that are lower than variable rates to encourage customers to lock in their Home Loan. In these uncertain times this gives the lender some certainty that the loan will remain with them at least for the fixed term. There are advantages and disadvantages to locking in your interest rate which would determine if fixing your rate is the best option for you.
Advantages
- Security
When you fix a rate on your Home Loan you are guaranteed that the rate will not change for the period you have fixed for. This means your repayments will also remain unchanged which is helpful for household budgets.
- Potential Money Saver
If you are able to fix your rate at the right time you will save money on interest, potentially thousands of dollars. For example, if you were to fix a rate today you could lock in for as low as 2.09% for two years with some lenders. These same lenders have variable rates at 2.69%, and if those variable rates do not reduce below 2.09% over that two year period the benefits of fixing at the lower rate would be substantial.
- Some Flexibility
Most lenders will allow borrowers to make additional repayments when they have a fixed rate loan without incurring a penalty. It is most common for any extra repayments to be capped at a maximum $10,000 per year.
Some lenders also offer the ability to have an offset account linked to the fixed rate loan to help reduce interest costs further, although these are generally only partial offsets usually 40%. For example if you had a $1,000 balance in an offset account only $400 of that balance would be offsetting your loan.
Disadvantages
- Penalties may be payable for early repayment
If you become dissatisfied with your lender, decide to sell your home or you simply want to take advantage of better deals elsewhere, when you are locked in to a fixed rate you could be charged a substantial interest penalty to break the contract. A complex formula is used to determine what the loss to the lender would be if the fixed rate contract is broken which is outlined in any Home Loan Contract. This penalty could offset any benefit you received by locking in originally.
- Most flexible features are unavailable
Flexible features that are standard on most variable rate loans are either not an option, or offered with reduced benefits on a fixed rate loan. Offset is typically not available, or only offered as partial offset reducing the effect it has on interest saving, and redraw is also not available on fixed rate loans.
- Potential to lose on the interest rate bet
Fixing a rate is effectively betting that the fixed rate will be lower than the variable rate for the time you choose to lock in for. In a volatile interest rate environment, where variable interest rates are dropping, if you have a fixed loan your rate will not reduce. The inflexibility of the fixed rate which is great in stable environments can be a curse at other times.
What if I can’t decide which is the best option?
If you can’t decide which option is the best one for you it is possible to hedge your bets. Lenders also offer a split loan option which means you can have a portion of your loan at a fixed rate and the balance on a variable rate.
To work out which option would be the most suitable to meet your circumstances, it would be a great idea to speak with a mortgage broker who can guide you through the products available.
At SHL Finance we are open for business and available to speak with you at any time. We are already proactively helping our clients negotiate a better rate with their current lender, reviewing their existing loans and discussing ways to potentially save clients thousands of dollars. We would love the opportunity to help you too. Please call Reece Droscher on 0478021757 to discuss your options.
