To fix or not to fix?

img-house2With interest rates at an all time low and commentators in the media speculating on what long term interest rates may do, many of our clients are asking: should we fix the interest rates on our loan now, or is it better to have a variable rate?

Which Loan Is Right for Me?

To answer that question, it really depends on your personal situation.  Variable and fixed rate loans have their advantages and disadvantages.   It is important to consider the pros and cons before making a decision.  Alternatively, you could hedge your bets and split the loans and have one half fixed and the other variable, allowing you to have one foot in each camp.

Variable Rate Loans

Advantages Disadvantages
When lenders drop rates, so does the interest on your mortgage.  Savings are passed on directly to you. Interest rates will move whenever the Reserve Bank or Lenders increase or decrease the rate.  This may increase your interest repayments.
Additional repayments can be made usually with no penalties. Additional repayments are limited, and penalties may apply if you break the fixed rate contract.
Additional repayments may have the option for Redraw at a latter date. No Redraws usually possible.
Provides the most amount of flexibility Limited flexibility and repayments are fixed for the period.
Variable rates may be lower than the fixed rates at that time.

Fixed Rate Loans:

Advantages Disadvantages
During the fixed term, your repayments remain the same – making budgeting easier. Your flexibility of making extra repayments are limited and can sometimes incur a fee for any additional repayments to shorten the loan.
If rates were to increase during the fixed term, your loan interest rates remain the same and won’t change. When interest rates go down, your loan will remain at that rate, and you do not have the benefit of potential savings.
If you choose to exit or switch your loans, there may be early termination fees.

How easy is it to switch to another financial product?

Depending on the loan you have, it can be expensive to stay with the current loan product if it is not right for you.  Especially if you think it is too expensive or too difficult to investigate switching to another option.

As credit advisers, we research the various options available to you, and can advise if changing products is the right solution for your situation.  We can help to make the process as smooth as possible to change your product.

If you do decide to change, make sure that you will be better off after taking into account the costs associated with switching your loan.  These may include:

  • Termination or break fees, for exiting your current loan early. For fixed rate loans, in particular, such fees may be high. You will also have to pay the lender’s legal fees for discharging the mortgage over your property.
  • Fees and costs associated with the new loan: application fees, stamp duty on your new mortgage, valuation and legal fees.

 

As there are many factors to consider before making a change, please give us a call so that we are able to help you.

Contact us now to research options best suited to your needs and find out whether your current loan is still the right option for you.