With interest rates at record low levels, today we’ll look at a question that many are asking: should I lock in a fixed rate home loan?
You may have seen more ads than usual spruiking super low fixed-rate mortgages.
Here’s why: lenders are scrambling over one another to lock-in customers right now. And their weapon of choice? Fixed-rate home loans.
With so many families doing it tough right now, locking in a low fixed interest rate can be an appealing option to reduce your monthly repayments and obtain peace of mind.
Here the team at Vault Plus Mortgages weigh up the pros and cons to help you stay informed.
Consideration 1: The bank is not offering it out of the goodness of their heart
Let’s get the obvious one out of the way: banks are not promoting fixed-rate home loans right now as an act of goodwill.
They’re there to sell a product. And they often use this product in particular when they’re trying to stop clients from walking away. Not only are you locking in a rate, but the lender is locking you in, too.
Consideration 2: Loss of flexibility
We all know the big benefit of locking in a fixed rate: you get a guaranteed low rate for however many years you lock it in for.
But it also comes with a downside, which is: a general lack of flexibility in respect accelerating your repayments or switching loan products or lenders.
Indeed, breaking a fixed home loan (before it’s expiry date) can be expensive, so we urge careful consideration before jumping in.
Consideration 3: How low can they go?
The Reserve Bank of Australia (RBA) cut the cash rate to a record low of 0.25% in March – the second rate cut that month.
Now, most experts believe this is as low as the RBA will go – and even RBA governor Philip Lowe has made it clear that he regards 0.25%, rather than zero, as the “effective lower bound” for official interest rates.
But that doesn’t mean the banks can’t drop their interest rates lower independent of official RBA rate cuts. Time will tell.
So how do I decide (what is best) for me ?
Acknowledging that the banks are looking out for themselves, there are times when locking in an interest rate may be the best option for you and your family. The questions we need to ask ourselves include;
- Do we genuinely plan on keeping the property that will secure this loan (for the term you are looking to ‘fix’ for). In other words if you’re considering a 3 Year Fixed Rate, are you confident you will hold this property for a minimum of 3 years.
- You’re confident that your circumstances wont be changing over this prescribed period (the period you are looking to ‘fix’ for), in other words aside from your desire to save money on your home loan it is ‘business as usual’ with you for the next few years.
If the answer to these two questions is ‘yes’ then “Fixing” your home loan might be a worthwhile consideration.
Lets say you have a home loan of $500,000 and the Fixed Rates on offer are ‘only’ 1% lower than what you are currently paying. That’s a saving of $5,000 pa ! That will get you two return tickets to an overseas destination (which you cant get to right now haha). Or in the current climate you could do your bit for the economy and invest into Dan Murphy’s or Iconic – whatever your ‘poison’. Or you could reduce debt ! You get the point.
The key message here is – if it benefits you and your loved ones to refinance to a Fixed Rate loan, then look after yourself because that is what the banks are doing (looking after themselves).
Would you like your cake and be able to eat it too ?
Many of you will be rightly saying that Fixed Rates are too inflexible as I cant make extra repayments as my cash-flow permits. If this is a consideration get in contact as we have market leading lenders that offer a fully functioning Offset Account with their Fixed Rates which clearly alleviates this issue.
If you’re still unsure of what’s best for you, just ask me – you know Im available all day everyday.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.