There’s been a lot of talk lately about interest rates being the lowest we’ve seen in decades, which naturally begs the question: should I lock into a fixed rate? The answer might seem like an obvious one, but there is much more to consider in this picture. Locking into fixed interest rates for your home or investment loan does have its advantages beyond just the current low rate. For one, fixed interest rates allow you to monitor your cash flow more closely and strategically for the duration of the term. Which is especially helpful considering the rates won’t stay low forever. However, there are disadvantages to this option which you’ll need to know if you wish to make an informed decision. So if you need help determining whether or not you should opt for a fixed rate, ask yourself these five questions first.
1. Will I want to sell my property during the fixed loan period?
If this is a possibility, you will need to speak with your financial institution to find out if a penalty applies for breaking your loan commitment. It is not uncommon for these penalties to be quite costly.
2. Will I want to access the equity in my property to invest further during the fixed period?
Again, this will often come at a cost that may be severe or even prohibited.
3. Do I need an offset account?
An offset account is a transaction account linked to your loan. Many borrowers use it for their savings so that, as the name suggests, the credit balance is offset against your outstanding loan balance, therefore reducing the interest on that loan. Sounds like a good idea, right? It is. However, most fixed rate loans do not allow an offset account, so if this is something you need, a fixed rate is probably not going to work for you.
4. Can I make extra repayments off my loan?
When the cash flow is up, many borrows like being able to throw extra money at their loans. But be careful, as some lenders will restrict the amount of extra cash you can repay each year when you fix your interest rates. If you are able to save significant amounts, you may consider leaving some of your mortgage variable and maximising the use of your offset account.
5. How long should I fix my loan for?
There is no easy answer to this question. Here’s the thing: locking in for a short period of one or two years will do you no good if you think interest rates will rise again during that time. This means that when you come out of your fixed rate, you will have to pay the higher interest when you could’ve instead committed to a longer period and capitalised on the longevity of a lower rate. However, if interest rates continue to fall and you’ve locked into a long term period, you could be missing out on substantial savings. In this instance, it’s probably best to seek professional advice.
Knowing whether to opt for fixed or variable interest rates is largely a gamble – little more than an educated guess. And there are also other factors to consider, like job security, for example. So while fixed interest rates have the benefit of static mortgage repayments, the costs for breaking the fixed rate loan can impact you significantly. It is a tough decision, and often you won’t actually know until three or four years later if you made the right one.
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