More Tips | Fixed Rates
"If a fixed rate has a 5 in front then that is a good deal" - This is a comment I heard recently and it had me hit the history books. In fact over the last 20 years the average long term interest rate is approx 7.5%pa so when fixed rates are below that amount they seem attractive but you need to assess if they really fit your long term plan.
So should you fix your interest rate? Before you can even answer that question you should know what affects interest rates and what will be causing rates to move in 2013. Click here to download now my free 16 page e-book that easily describes what you need to know to put you in the position to be able to assess if you should fix or not. The consequences of getting this wrong could cost you $'000's. Click here now to see the e-book
Read my article about Fixing Rates in Australian Property Investor Magazine Jan 2013
Should you Fix?
The major issue is if you plan to sell or refinance to another lender within that fixed rate period. You could be up for break fees so don’t fix if you think you are going to sell or move lenders.
Break fees are associated with breaking the fixed rate loan contract during the fixed time frame, however if the variable rate is actually higher than the fixed rate then often there is only a small exit fee. However if the variable rates are lower than you could be up for thousands in break fees. During the GFC I saw someone quoted $60,000 in break fees. This was when fixed rates were 9%pa and variable rates got as low at below 6%pa. So you need to work out what suits you and your plans for your property.
Interestingly the latest BIS Shrapnel report on the property market believes that the current variable rates which are around 6%pa will drop up to 1% more in the next 2 years and then start climbing again. So that in 3 years time they could be back to the current variable rates or higher. What does that mean? It might be time to think about fixing for more than 3 years, maybe 5 years.
One final thing on fixed rates – if you have a large amount of cash reserves and you benefit from your offset account then you might want to consider keeping some of your loan variable. You can split your fixed and variable loan any way you want ie. fixing 50% and keeping 50% variable or 10% fixed and 90% variable for instance. If you think you will have maybe $20,000 in savings a year and you are looking at a 3 year fixed loan (ie. $60,000 in total savings during that time) and you have $20,000 in savings now then you might want to keep a variable loan of $80,000 so the maximum of your cash will directly benefit your cash flow through your offset account. Just something to consider.
Essentially don’t fix rates if you think you will sell the property within the fix rate period – this could cost thousands. If you would like Investors Choice Mortgages to evaluate your current financial needs please do not hesitate to contact us.
- Jane Slack-Smith