WHAT TO CONSIDER WHEN FIXING YOUR HOME LOAN

Fixed rates are at an all-time low. When considering where the rates are at today, it may be a smart to fix your home loan but don’t do it out of fear and speculation. Fixing your loan should be based on forward planning and strategy. As with anything, it can also have negative consequences.

So how do you make an informed decision and know what’s right for you?

The advantage of a fixed rate home loan is having set repayments for a predetermined period of time, giving your certainty.  If you want certainty for your cash flow commitments then this is considered one of the best strategies. On the flipside there are disadvantages which you need to consider before making the decision to fix. Making the wrong decision could end up being costly and restrict flexibility and control.

 

When advising my clients on whether to fix or not – I use the following checklist

 

1. During the fixed term, how likely are you to sell the property? Breaking a fixed rate home loan all depends on the direction that the rates move. It can be costly also as for example if you fix your loan at 5% and when you are selling your property if the rates are 4%, the break cost can be significant.
2. Are you likely to access equity for renovations and home improvements? If the lender you fix your mortgage with is inflexible when it comes to releasing equity, you may find it costly to move to a lender that will allow easy equity release.
3. During the fixed term, do you plan on making extra repayments? Most of the lenders put a limit on the amount of extra repayments you can make. Be sure to look into this as it can be more costly then what it is worth. I personally look for a lender that offers 100% offset account linked to a fixed loan.
4. Do you plan on redrawing your additional repayments and have a transaction account linked to your home loan? Until the fixed rate term has expired, most lenders don’t allow you to redraw your extra repayments.
5. Do you want to invest in more property using the equity in your home? With some lenders, releasing equity for investment purposes can be frustratingly difficult. If you are forced to break the fixed term to refinance, again the break cost can be significant. A fixed rate will tie you with one lender during the fixed term as the break cost will be significant. This will restrict you from buying more property and cost you in lost opportunity.
6. Do you require flexibility with your home loan and have a higher than average household income? Although a fixed rate is a great way to lock yourself in against rate rises, most of the fixed rate loans don’t let you offset and it reduces your flexibility. Only some lenders have a 100% offset account option so make sure you choose a lender that offers 100% offset account.

 

Other issue to consider are based on your individual circumstances however I use the above checklist when advising clients as it covers the main issues for those considering a fixed rate home loan. Provided that it is based on the right strategy, fixing your rate may be right decision.

 

Before making any decision I highly recommend you speak with a Mortgage Broker to determine if fixing your loan(s) is the right action for you to take.  A few minutes on the phone may save you a lot of cost and hassle down the track.

 

Feel free to contact me on 03 8390 5855 for a confidential discussion if you’re not sure what this means for you or what you should do.  If easier please email at mitesh@thinkandgrowfinance.com.au