Should I fix my interest rate?
To fix or not to fix my mortgage rate? That is one of the most common questions lenders and mortgage brokers hear. The answer really depends on your personal situation. Fixing your loan could potentially end up helping you save a lot of money, and more importantly give you peace of mind. However, you may also find that you lose a lot of that flexibility you would have with a variable rate.
Fixed rate mortgages are a contract between yourself and the bank; where you agree to pay repayments at a certain interest rate for a certain period of time. Hence, they are a great tool to guarantee how much your monthly repayments will be for the fixed period. This is advantageous especially if you are expecting interest rates to increase and require some degree in certainty of how much repayments you’ll need to make for budget planning purposes.
Conversely, if interest rates do drop, your interest rate will remain at the fixed rate, consequently you do not end up benefiting from the decrease as you would if you had a variable loan.
You should also be mindful of the fact that should you wish to break a fixed contract prior to the expiry date, exit fees will apply and may be quite substantial depending on a number of factors. In addition, early or extra repayments tend to be difficult as they may attract fees.
When applying for a fixed rate home loan to purchase a property, you should keep in mind the fixed rate you ultimately obtain is not the current advertised fixed rate (which can change any time at the bank’s discretion) but the fixed rate at the date of settlement of the property. There is an option to lock in a certain fixed rate for 90 days however the fee associated with this may be quite costly. Thus, when purchasing a property with a longer settlement horizon, an easier way may be just to settle on a variable rate and look at fixing your rates afterwards.
Lastly, banks usually don’t offer an offset facility for fixed rate mortgages. To combat this, an option people can consider is to only fix a portion of their mortgage and leaving the rest of the loan at a variable rate. This way, you are able to benefit from the perks of having both a fixed rate and a variable rate.