Tell a friendIs it time to fix
Fixed Rate Mortgage - a mortgage that protects you from interest rate increases as it locks in your interest rate and repayments for a limited period of time. Since May 2002 interest rates have been increasing. The recent rapid succession of rate rises, including the lender-imposed increase in January has some people scared into thinking that rates only go one way, up.
However around 8 years ago interest rates were low and stable. Many borrowers were tricked into thinking they would stay that way, but they didn't. Although rates may continue to rise they will fall at some point, then they will rise again and so on. The real question is if interest rates continue to rise, how will it affect you?
As a rule of thumb a rate change of 0.25% will change your repayment by $21 per month for every $100,000 borrowed. An ordinary interest rate movement of 0.25% will change your monthly repayment for a $300,000 mortgage by around $63 each month, which is less than a daily cup of coffee at the local café. It is when rates continue to rise that you might become concerned.
Should you fix your mortgage
Taking a Fixed Rate mortgage is the only way you can be certain of your repayments and this is the only real advantage of this loan type. If you are concerned that further rate rises may cause you financial pressure, or you would just like certainty over repayments, then you should consider fixing your loan.
However before you rush into it, fixed rates are often two or more rate rises above competitive variable rates. This means there needs to be at least three rate rises early in your fixed period and no rate reductions for you to come out ahead financially. Our most senior economists are hinting that this is unlikely in the current climate, so opting for a fixed rate now could be a case of shutting the gate after the horse has bolted.
On the bright side, lenders occasionally offer fixed rate specials. The timing is often unexpected, and specials usually last for a very short time. To take advantage of these specials, check rates daily and apply quickly when the opportunity comes up. You can keep watch for specials yourself by contacting lenders on a daily basis or you can ask a broker to help you. If you rely on third party web sites such as broker sites, CANNEX or Infochoice, you may miss out, as the rates and information on these types of sites can be out of date. A good broker receives updates directly from lenders on a daily basis. They can let you know when specials come up which saves you checking with dozens of lenders every day.
If you do fix, remember to cap or lock your rate at application to prevent rate increases before your loan settles. If a lender will not guarantee your rate, go elsewhere to avoid nasty surprises that could easily cost you thousands.
Beware the 50/50 con
If you are not sure whether to fix your rate, lenders and inexperienced brokers are likely to suggest half-fixed and half-variable. The reassuring advice is 'you get the best of both worlds'. Whilst it might sound tempting, it is the lender who gets the best of both worlds, not you. The fixed half, which is often at a higher rate, anchors your whole loan with them no matter how well they look after you. It strips away your flexibility to vote with your feet. At the same time, if rates increase, your repayments also increase. This strips away repayment certainty, which is the only advantage of a fixed rate loan.
If you are not quite ready to fix, consider staying variable, increasing your repayments to what they would be if you took out a fixed rate and have your broker watch for fixed rate specials. This increases your equity, creating a redraw buffer for a rainy day, and positions you to take advantage of specials when they arise.
Winning the mortgage game.
The best way to win at the mortgage game is to pay your home loan out faster. A few simple things you do to make this happen are:
- Get the right home loan at a competitive interest rate.
- Health check your mortgage every 2-3 years to make sure it is still competitive and working the way you thought it would.
- Make regular, extra repayments.
- Keep credit cards to a minimum, only accept a card with interest free days, and pay the full balance out every month.
- Avoid taking out other credit including personal loans and interest free deals. This reduces the impact of rate rises and improves your ability to use every available cent to pay your mortgage off faster.
Remember, a good broker will not only save you time in finding a great loan, they stay with you for the long haul. Mates Rates Mortgages pays the lion's share of ongoing commissions to your loan, giving most of their profit to you and getting you way out in front, sooner.
