To fix your loan, or not?

No matter whether you currently have a home loan, or you are planning on taking one out in the near future, the decision by several of the ‘Big 4 Banks’ last week to slash the interest rates on many of their fixed rate home loans has given you something to think about.

Many of the buyers and owners we’ve been talking to recently are wondering whether this is the right time to lock in the rate on their loan. Now, as we’ve said before, the last thing we’re going to do is offer advice on anyone’s home finance. That’s what independent mortgage brokers are for!

However, we thought this would be a good opportunity to look at the main “pros and cons” of fixing a home loan loans in a general way to help people in their thinking.

The main pluses: Protection

No-one knows what the Reserve Bank will do next, but if and when they decide to raise official interest rates, you will be protected as the repayments on your fixed rate loan will remain steady.

Peace of mind

Now that several of the major Banks are offering 5 year loans at under 5%, you have the ability to plan your family budget several years ahead with real certainty. You can know exactly what your repayments will be for up to 5 years, which can be very reassuring for some families.

Minuses: Not so flexible

They call it “locking in” your loan for a reason. So if you think you may want to make a move during the term of the loan, bear in mind that there is likely to be penalties if you repay the loan early. It is also more difficult to make additional repayments on a fixed loan during the term without incurring extra fees as well.

All things must end

At the end of your loan term, your interest rate will return to the variable rate at that time unless you fix it for another period. Either way, interest rates will be different then, so you need to allow for that.

It’s not just the rate

Many fixed rate loans come with higher fees to establish or maintain the account, so be sure to factor in all of the costs in assessing the financial suitability of the loan. The important thing to remember is that any decision to fix your mortgage depends entirely on your financial position and plans for the future.

There is no “one size fits all” right and wrong answer. So you should always weigh up the short and long-term consequences, compare a variety of different loan options and, as we always say, talk to an independent advisor before you commit to anything.

Disclaimer: The contents of this article are believed to be accurate at the time of posting. Any advice here is of a general nature only and has not been tailored to your personal circumstances. Please seek professional advice prior to acting on this information.