Is it time to lock some or all of your mortgages into fixed rates? Or is it too late?
Starting late last year, the banks slowly increased their fixed-interest loan rates, and now variable-rate loans are costing more.
And the Reserve Bank has made it clear it’s going to keep increasing the official cash rate until they get inflation under control.
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This has led many investors and homeowners to reconsider the cost of one of their biggest expenses - their mortgage. And many are looking to lock in their interest commitments, recognising they've already missed the bottom of the interest rate cycle.
So how do you decide what’s right for you?
And what do you need to consider to ensure you make an informed decision?
I don't know how much higher "official” interest rates are going to rise but the money market is factoring in significant further increases in rates.
And while it’s clear borrowers have missed the bottom of the interest rate cycle, "locking in" to a fixed-rate home or investment loan gives you the advantage of knowing what your commitments will be for a predetermined period - the fixed term.
This could be a suitable strategy if you want certainty for your cash flow commitments - especially if you're worried about your cash flow.
However, there are also disadvantages that you need to be aware of before you make a decision.
With this in mind, here are seven questions you should ask yourself when considering whether to fix your loans.
1. Will I want to sell my property during the fixed-loan period?
If so, there could be a penalty for breaking your loan commitment.
2. Will I want to access the equity in my property to invest further during the fixed period?
Often this will come at a cost that may be prohibitive.
3. Do I need an offset account?
An offset account is a transaction account linked to your loan.
Many borrowers put their savings into this account and the credit balance here is offset against your outstanding loan balance, reducing the interest payable on that loan.
Most fixed-rate loans do not allow an offset facility.
4. Can I make extra repayments off my loan?
Some lenders will restrict how much extra you can repay each year when you fix your loan, so, if you are able to save significant amounts, you may consider leaving some of your mortgage variable and maximising the use of your offset account.
5. What balance of fixed and variable rates do I need for my portfolio?
Even if you only have one loan, you can usually split the facility, with a portion being fixed and the rest being a variable loan, giving you the flexibility you need.
Many beginning investors choose to have a bet each way and lock in 50 per cent of their loans, while investors with larger portfolios protect themselves by fixing a larger percentage of their loans.
6. How long should I fix my loan for?
Now, this is a difficult question, but if you believe that interest rates will remain high for a number of years, then fixing for a short period such as two or three years may not make sense.
That’s because your loan facility will mature and revert to the prevailing interest rate at a time when they could be a few percentage points higher.
This is an area where you should take specialist advice.
7. If interest rates don't rise too much, what will locking in today cost me?
How would you feel if you'd locked into a five-year loan facility and interest rates dropped in a year or two?
In fact, Westpac is forecasting that after a number of further interest rate hikes, the official cash rate may fall a little in 2023.
However, I know when I've been in that situation I took comfort in the fact that I was not trying to beat the banks; instead, I had secured my cash flow position.
Yet, I know others who have become stressed when rates turned against them.
I'm clearly no expert in this field (over the years I often got the fixed-v-variable decision wrong) so please get expert advice regarding your own circumstances.
There are many other issues to consider - such as your job security – so, speculating on rate movements is fraught with danger and making a fixed-v-variable decision for the wrong reasons can be costly.
While fixing your rate has the benefit of achieving “certainty” with your mortgage repayments, breaking a fixed-rate loan can be costly as well as removing flexibility and control.
Choose wisely because you’ll only know if you’ve made the right decision in three or four years.