The Bulletin

Is it Time to “Lock it In”

Tim Cece | Director, Search Mortgages

Interest Rates are at an all-time low and the lure to lock in an incredible rate for the next 3-5 years has never been better, but should you lock in a low fixed rate or go with a variable rate? Here are five things to consider.

How low can rates go?
Interest rates are at an all-time low and many economists believe there may be further to fall with the possibility of more cuts predicted. Therefore the danger is, if you fix your rate now, you won’t reap the benefits of later decreases.

So how low do you think interest rate will go? And how quickly will they start to rise once they start going up?

Timing is crucial – but one thing you can be sure of – once rates start rising, the fixed rates will already be far higher than the variable.

Knowing your budget
How good are your budgeting skills? If you want to know your precise repayment obligations for the next three or five years, then a fixed rate is ideal. Fixed rates cancel the levels of uncertainty surrounding fluctuating interest rates and potential increased monthly repayments. This is quite a common option for first home buyers and young couples starting a family as they can manage their finances moving forward

Fixed but not flexible
Fixing a rate denies you some flexibility. Often fixed rate loans don’t allow you to link an offset account, and once you fix a rate some lenders won’t let you make extra repayments to reduce your principal. If you have extra funds available eg you come into extra money by selling a large asset, a work bonus or an inheritance, you may lose the opportunity to make a considerable dent in your mortgage. Variable rates on the other hand will rarely have these limitations meaning you can be aggressive in trying to repay your home loan as quickly as possible by making extra repayments above your minimum required repayment.

And remember if you need to pay out or refinance a fixed rate loan early you are at a disadvantage.  Lenders often charge a break fee if you make changes to your loan or pay it off early whereas a Variable will not incur break fees for paying off early.

Fixed vs variable: It’s pretty even
According to a study conducted by Canstar the advantage of a variable versus fixed rate is fairly small over time.

Canstar compared an average three-year fixed-rate loan with variable rates over twenty years. People who fixed their loan were ahead for 112 months, while those who chose variable did better for 123 months.

Think you can beat the banks?
Think again… it’s important to eliminate the entire thought of beating the bank. Banks employ a team of economists and actuaries working around the clock to monitor fluctuating interest rate patterns. They invest an astronomical amount of time and money to ensure they get figures as accurate as possible.

Seeing interest rates decrease understandably prompts borrowers to think about fixing their mortgage to a low rate. If you’re weighing up the options, consider the benefits and drawbacks of locking in a low rate versus the flexibility of a variable loan and only fix your home loan because it suits your personal circumstances.

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