Do You Have a Fixed Mindset?

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Everyone seems to be an expert when it comes to discussing fixed versus variable rate home loans.  But for us it is personal – your personal sleep at night factor.

Don’t kid yourself that you will beat the banks by choosing if and when to fix your home and investment loans – they have people way smarter than us determining what is likely to happen to rates in the long term. Fixed rates are determined at the bank’s discretion and often used as tactics to attract new customers.

While I am generally not a big fan of fixed rates (as the banks normally make margin on them), if you are someone who needs a period of certainty in your repayments for your home loan or investment property loans, and providing it is affordable, this is what needs to drive your decision.

However, I normally suggest not fixing for anything more than 3 years as fixed rates for terms longer than this come at a cost premium and a lot can happen to rates given global economic dynamics in the long term.

If you do fix your property loans, there are a three things you need to consider:

  1. Your offset account debt reduction feature switches off when the loan is fixed (with the exception of a couple of banks).  The solution is to have a portion fixed and a portion variable so that offset savings still apply to the variable component.
  2. Most banks only let you pay down an extra $5,000 to $20,000 per year while the loan is fixed before penalty fees apply.
  3. You need to be confident to keep your loan fixed for the full duration selected. Significant ‘break’ cost fees can apply if you decide to revert to variable early or pay down any or all of the loan.

Tim Lawless, Asia Pacific Research Director for Core Logic RP Data recently said, “With bank funding costs moving higher, there is some risk that mortgage rates will increase outside of any movements from the Reserve Bank’s overnight cash rate.”

In other words, banks are likely to increase rates in the short to medium term independent of the Reserve Bank of Australia. Given that we appear to be at the bottom of the rate curve, now may be a good time to lock in some of your home loan on attractive fixed rates that go as low as 3.99% for 3 years.

Let’s start the conversation .. to fix or not to fix.

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