Should you fix your home loan or investment loan
Interest rate movements have always been hard to predict, but even more so now that more lenders are acting independently of the RBA (Reserve Bank of Australia). In fact, several Banks have only recently increased their fixed rate and variable loans by approx. 0.10% – 0.20% without any RBA movement.
Part of this is brought on by APRA who still request that Lenders slow down lending to the investment property and interest only repayment market.
However, if you are thinking about fixing your loan and the main driver is to save on interest, think again! It’s not what it’s about and people who focus on this aspect are missing the point. A fixed rate mortgage is an insurance policy against financial pressure brought on by mortgage rate movements, especially rapid ones that could cost you.
We’ve outlined some of the pros and cons to fixing below.
Fixed rate pros
- A determined repayment amount/rate for a set period of time allowing the client to budget for the future
- Not subject to outside rate fluctuations such as the RBA rate announcements
- Allows some bulk repayments, generally up to $10k per annum without penalty
- Generally good for investment loans providing the client is not looking to sell the asset during the fixed rate term and looking at a long term strategy
Fixed rate cons
- You won’t receive any benefit if variable rates drop
- Fixed rate loans have pre-payment costs if the loan is repaid or more than $10k in extra repayments occurs. This can be a hefty penalty depending on the rates at the time of fixing and at the time the loan is repaid.
- Generally fixed rate loans do not have redraw or offset although some smaller lenders do allow.
For most of us our mortgage is the largest and most costly decision of our life. Careful consideration and regular annual reviews are critical to ensuring you are getting the most out of your mortgage. Whilst there is never an absolutely right time to fix your loan, it is one aspect to consider at each review.
Part fixed, part variable can be a good option. It can provide options and features only available on variable rate loans while obtaining some protection against rate increases.
There is no doubt that in a climate of so much uncertainty, cheap fixed rates are starting to become increasingly attractive. However, you should remain mindful of the limitations of fixed rate loans.
If you are trying to repay your loan quicker, always ask your Bank or Broker to request a discount off your existing Bank first and remember that even small, regular amounts of money really do add up. Fortnightly repayments are a must and make extra repayments if possible.
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