One of the most regularly asked questions by mortgage borrowers is “should I fix my loan?”. Before you make the decision to fix or not to fix your mortgage, let us have a look at the main features of a fix rate loan.
What is a fixed rate mortgage?
Interest is paid at a fixed rate over the term of a loan or investment. Fixed home loans have an interest rate that is fixed for a set period of time. Generally 1 to 5 years with some lenders offering 7 up to 7 years. At the end of the fixed rate term, the loan will usually switch to the standard variable rate offered by the lender.
The advantages of a fixed rate mortgage
The main advantage of a fixed rate loan is that we know exactly how much the monthly repayment will be over the fixed time period. This definitely provides peace of mind. Which also means that during the fixed rate periods any rate increases will not affect you.
The disadvantage of a fixed rate mortgage
However, fixed-rate home loans tend to be inflexible.
1- Normally it doesn’t come with an offset account.
This means, if you have extra money, you will not be able to put the money in an offset account and enjoy the interest repayment deduction.
2- Restricted additional repayment during the fixed term
Most of the lenders will allow you to make some additional repayment to the loan during the fixed term. The amount ranges from $20K - $30K.
For example, if you fixed the loan for 2 years, and your lender allows $20K additional payment, you can deposit another $20K on top of your normal monthly repayments. This $20K can be made in one deposit or few deposits over the 2 years period. But you will not allow depositing more than that even if you have more.
3- Potentially facing expensive break cost if the loan is repaid earlier
You will face an expensive break cost If the fixed rate loan is paid out before the fixed term finished. Often this happens when the property been sold or the loan been refinanced. So it is better not to sell your property or refinance your loan if you have a fixed rate loan associates to this property.
4 - Might miss out the lower rate if home loan interest rates drop
Fixed rate loans provide us with the stability of knowing that the repayment will be the same every month. But, in the same time, a fixed rate loan does lock you into an interest rate for a fixed term. So if the interest rate dropped during your fixed term, you will still be paying the higher fixed rate.
So, no matter what the interest rates are doing, depends on your personal plans and situations, a fixed rate home loan might not be the right choice for you.
How much should I fix?
This is the second most asked question. You don’t have to fix the full amount of your loan. It is common to choose a split loan structure.
In a split loan structure, you can have part of your loan fixed while and the other as a variable. This allows you to enjoy the most of the benefit of both types of your home loans. How much you should fix depends on your maximum repayment in the fixed term.
For example, your home loan is $500K, you know that in the next 2 years, you can make maximum $100K deposit into your loan. So the split loan structure should be $100K variable rate and $400K 2 years fixed rate.
So, your goal is to repay the $100K in the next 2 years while the $400K with a set monthly repayment amount. At the end of 2 years, your loan will be reduced by $100K, then depends on the situation, you can decide whether or not you should have a split loan again and set yourself a goal for the next 2-3 years.
There are many ways to use a fix rate loan properly to help you achieve your financial goals. If you are looking for more details on whether or not you should fix, when to fix and how much you should fix we're happy to have a quick review of your situation and provide some options.