Consider these three questions before making the decision to switch to fixed interest rates.
Blogger: Philippe Brach, CEO, Multifocus Properties and Finance
Many of our clients have contacted us in the last few weeks to enquire about fixing their mortgage interest rates.
After a number of major banks began lifting their interest rates for investors, and then raised them again for all home loan customers, this is hardly surprising. No one likes paying more for anything than they have to, least of all their mortgage.
But before you rush into a fixed-rate loan, there are a few questions you need to ask yourself first:
1. What is my motivation for fixing my interest rates?
Are you keen to fix in order to ‘beat the market’ and save money, by locking in a lower fixed rate than the variable is likely to become?
If so, you’re probably setting yourself up for failure.
You see, banks don’t offer a five-year fixed rate of 5 per cent to customers if they expect they’ll be able to charge 8 per cent for the exact same loan in half a decade. They set their fixed-rate terms based on a number of factors but, ultimately, they’re in the business of making money. They’ll only offer a product or rate if the information they have at their disposal tells them it’s a profitable risk.
If your motivation is rate certainty, however, that’s a different story. Being able to lock in an affordable mortgage rate for a set period of time is the ideal reason to fix your interest rates, because it means your objective is being met – consistency of repayments – and any long-term rate savings are considered a secondary benefit.
2. Is there any chance I will want/need to sell my property or access equity during the fixed loan period?
Investors who foresee that they may need flexibility during the expected rate-lock period should think long and hard before fixing their rates. It is possible to break your fixed loan commitment, but there can be substantial financial penalties for doing so.
If flexibility isn’t as important, then fixing could be the right way to go. We recently helped a client switch from one of the ‘big four’ banks to a smaller lender; she was paying 4.87 per cent and is now paying just 4.29 per cent, fixed for three years and as part of the refinance, she accessed $50,000 in equity to purchase another investment property.
While she is saving money on this deal, her primary motivation for fixing was to unlock equity in the refinance process and to ensure repayment certainty over the next three years. During this period she has no plans to buy, sell or change her property position, as she and her husband plan on starting their family. This is the epitome of a strong fixed rate strategy as it suits the client in terms of their life-stage, financial position and goals – a win-win-win!
3. If interest rates fall further, what will fixing my rates cost me?
When you fix your mortgage interest rates, at some point during the fixed-term period, there’s a good chance the variable rate will drop lower than the rate you have locked in.
Many borrowers become stressed when this happens but it’s really just part of the ‘gamble’ of rate-fixing. Call it Murphy’s Law, call it the reality of mortgages – whatever it is, it’s the way it plays out for most borrowers.
I concentrated on the fact that I had enjoyed a fair, competitive rate on my mortgage/s, which had allowed me to carefully plan my finances and strategically structure my property portfolio. I’m in this for the long haul and when you adopt a ‘bigger picture’ view, paying a little more or a little less on your mortgage for a year or two isn’t a big deal.
Still not sure which way to go?
Are you still not sure whether fixing your loan (or perhaps part of it) is the right move? You don’t need to make this decision on your own; turn to your trusted team of advisers and property professionals for guidance.