When you fix interest rates what are the key things do you think about? Everyone’s circumstances are different. It is always important to seek advice from your mortgage broker on whether fixing is a path you could take to potentially reduce costs and lock in the monthly repayments. Make sure you consider the pros and cons of fixing the interest rates for your property.
There is an intense fixed interest rate price wars on between the lenders at the moment.
In our personal experience and hindsight when we advise clients on fixed vs variable interest rates, below are 5 things we recommend to be considered, and recommend that you consider as well:
- Are you in portfolio accumulation phase? What are your goals mid to long term? What’s your age right now – how does that play into your goals? What are your life plans over the next 1 to 5 years? Do you intend on selling the property? This is also tied into where the market is in the property cycle. Do note that, if you wish to discharge the loan – i.e. sell, or refinance the property, within the fixed term, you will most likely have early repayment / break fees.
- How the repayments differ for Principal & Interest (variable vs. fixed) and Interest Only (variable vs. fixed)? What are the impacts for either of these options on the end result on your loan balance?
- Is there potential to extract equity from the property? This is even more important where your Loan to Value ratio is 80% or below, because, in this instance, you can ‘Valuation’ shop with lenders (depending on suitability of the lender) to see if you are able to extract more equity for further investing. This is even more important where you are in the accumulation phase of your real estate portfolio. Fixing the interest rate would mean you have to ‘stick’ to your existing lender for years before you could refinance to another lender. Note – fixing rates does not prevent you from accessing equity with your existing lender;
- Can you use the offset account while the loan is fixed? If you fix the full loan amount, most lenders don’t all you the advantage of the offset or a redraw account. Some lenders have 100% offset available for fixed loans – but note, lender selection is based on suitability;
- Whether the lender allows any additional repayments during the loan term? Is this important to you? Some lenders allow additional repayments toward the fixed loan, so you may have the potential to have multiple fixed loan splits and option to make additional repayments toward each split (in some cases up to $30k per split!), without the lender penalising you.
Right now, given the fierce competition between lenders, and with the regulatory changes resulting in interest only loans requiring a lot higher deposits, and interest only interest rates being higher than principal and interest, it is worth considering whether better options are available to you, to …
- Access the relevant equity (if now is a good time to lock in the equity)
- Simultaneously reduce costs and therefore be able to pay off your loan faster with potentially fixing the interest rates
Consider speaking with your mortgage broker on the options to re-value, refinance and save are available. The key would be making sure they structure such that you can maximise savings and minimise risk over the mid to long term.
For mortgage broking advice on setting up finance correctly for your home and investment properties, the Property Twins team can be reached on 1300 97 60 60 or [email protected]
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