Should I fix my home loan? 6 easy questions to help you answer this!
Recent changes to both fixed and variable interest rate loans have resulted in a significant amount of client inquiries about fixing loan interest rates.
Many have concerns about the ramifications of a potential increase in interest rates and how this would affect the affordability of your loan repayments. Some have been more interested in locking a portion of your loan at the current fixed interest rates available while maintaining a variable portion to allow the flexibility of extra repayments. Others are considering fixed loans relating to investment properties to enable minimum repayments to these deductible debt loans should interest rates increase.
Fixed interest rate loans can be an effective risk management tool when used appropriately
To assist you in understanding if a fixed rate loan may suit you, we’ve designed a few questions for you to consider. Have a read of the points below, and if any of these questions leave you wondering about your own circumstances, pick up the phone to your Finance Manager. They will listen, bounce ideas around, and help get you off to the best start possible for 2017.
1. Are you trying to predict the interest rate cycle
Nobody can accurately and consistently predict the future direction of interest rates. If this is your objective, you will get it right sometimes and wrong sometimes. However, if you are worried about the effect of interest
rate increases on your cash flow or ability to repay, then the certainty of fixed repayments could allow you to sleep easier.
2. Have you considered fixing all or part of your own Home Loan, or have you only considered this for your investment property?
If there is an interest rate rise, this would have a negative impact on your cash flow. If you have an Investment Loan, you have the potential to offset any increase with a tax deduction to cushion the impact. However, any increase in your Home Loan payments has to come 100% from your pocket. If this would hurt your lifestyle and other financial goals, this could be the catalyst to consider fixing part of your Home Loan.
3. Are you considering using any of the equity in your property in the next three to five years?
If you lock yourself into a fixed loan for a period of time, it can restrict your capacity to refinance without penalty. It doesn’t mean it can’t be done, but it does mean it may be more difficult and costly. An understanding of your goals over the short and medium term is important when considering a fixed interest rate loan.
4. Will you sell the property within the fixed loan period?
If you are planning on selling in the near future, don’t fix. To break a fixed loan can attract penalties which in some cases can be significant. If you are thinking of selling, a fixed loan is not for you. You will likely need the maximum flexibility that can come with a variable interest rate loan.
5. Will you have the ability to make extra repayments to your loan?
While some fixed rate loans allow extra repayments, these are restricted and the extra repayments are usually not eligible for redraw. As a general rule, fixed-rate loan products are quite restrictive. To overcome this, one option is to ‘split’ your loan and have part of your loan fixed and part at a variable rate. This gives you the opportunity to pay any extra repayments, bonuses etc into the variable loan while safeguarding the interest rate on the fixed part of the loan. This option can provide the certainty of a fixed interest rate for a large part of your loan with the flexibility of a variable rate to make extra repayments.
6. Consider whether a ‘fixed rate lock fee’ is worthwhile?
When you take out a fixed interest rate loan, you get the fixed rate applicable at the date the loan settles, NOT the fixed rate on the day you apply. That means if you apply and rates go up between the time you apply and the time the lender settles the loan, the higher loan interest rate would be applicable. However, with most lenders, the interest rate at the time of application can be locked in so you can be certain of the fixed rate that will be applied. Such a feature will usually come with a fee though, so a judgment will need to be made at the time of application on the cost-benefit of locking in the fixed rate on the day of application.
If after reviewing these points your choice is to fix, you can have the best of both worlds by combining fixed and variable loans. This can both provide certain of your payments while allowing the flexibility to repay the variable loan portion without restriction. There will be other considerations you need to take into account and above all, your circumstances will be unique to you. If you are considering fixing any part of your loans, your Finance Manager is a great source of advice to help you decide the best strategy for you.