CFS Blog

CFS Blog is a dedicated content rich resource for people wanting to keep up to date on latest trends in the finance industry. We reveal tips and strategies that help you achieve your financial independence.

Is it Time to Fix Your Home Loan?

- Wednesday, June 03, 2009

Fixing your mortgage interest rate can offer certainty around repayments, but it can come with some restrictions

Interest rates began to fall sharply in September 2008 as the Reserve Bank of Australia (RBA) moved to tackle the worsening economic crisis. The official cash rate now sits at just 3 per cent.

While there are forecasts that the cash rate could fall as low as 2 per cent by the end of the year the RBA has put further cuts on hold over the last couple of months while it assesses the economic situation.

The question is, with the cash rate nearing the end of its downward cycle should borrowers fix their interest now or hold out for a lower rate; on the other hand should they just stick with a variable rate?

It is notoriously hard to pick the absolute bottom of any market cycle and borrowers considering fixing their rate should first weigh up the pros and cons of locking in a fixed rate.

A fixed rate essentially gives borrowers the security of knowing exactly what their monthly repayments will be for a set period of time. Fixed rate terms are typically between one and five years with the rule of thumb that the longer the period, the higher the rate.

The key benefit of a fixed rate mortgage is that should interest rates start to climb fixed rate borrowers are shielded from any increases for the duration of their fixed rate term.

However fixed rate loans do have some restrictions and are less flexible than variable rate mortgages – for example, if you sold your house within the agreed fixed rate period you may be liable for a penalty for breaking the fixed rate term.

Remember that while a fixed rate will protect you from any rate increases, should rates fall further you’ll be stuck paying a higher rate. What’s more, breaking a fixed rate term can prove very expensive so consider the term that you agree to with your lender carefully.

For borrowers who’d like the best of both worlds it is possible to split your loan between fixed and variable. You can decide what proportion you’d like to fix depending on how confident you feel about future rate movements.

There’s no right or wrong when it comes to choosing between fixed or variable rates – it’s really down to whether you want to have certainty over your repayments. Before making any decision it is well worth considering your short- to medium-term plans; give us a call and we can discuss the pros and cons of a fixed rate loan and which option is right for you


 
David Carruthers is a credit representative (Credit Representative Number [400226]) of BLSSA Pty Ltd (Australian Credit Licence No. 391237).