To fix or not to fix?

Ah, that’s the big question.  The banks have recently increased their variable rates out of sync with the Reserve Bank and the outlook is for more out of cycle rate rises later this year.  To combat this, you might like to consider fixing a portion or all of your loan.

The rate on your home loan can generally be fixed from 1 to 5 years and offers you the benefit of peace of mind and budget certainty so you can sit back and relax knowing “that’s my rate and that’s my payment”.  However, fixed rate loans carry some stings in the tail:

• Redraw is generally not available

• 100% offset is also not usually available

• A penalty may apply for prepayments during the fixed rate term.  The amount of that penalty depends upon the size of the prepayment, how long the fixed rate contract has to run and the extent to which interest rates have moved and in which direction.

Variable rates on the other hand have complete flexibility.  Obviously the main disadvantage is that if rates go up, your rate goes up but if rates come down, your rate comes down.  Most variable rate loans also have features such as free redraw, 100% offset and the ability to pay off as much as you like whenever you like without penalty.

OK so both fixed and variable rate loans have their pros and cons.  What to do?  Why not have the best of both worlds by having some fixed and some variable?  That way, the bulk of your loan is protected against rate rises with the peace of mind and budget certainty that affords whilst giving you all the flexibility that goes with a variable rate loan.  There is generally no additional cost for this loan arrangement and at the end of the fixed rate term, the bank will write to you seeking further instructions.

If you are thinking of fixing, give us a call BEFOREHAND so we can discuss all the available options, let you know what rates are actually doing and help you with any paperwork.