Fixed rate or Variable rate, it’s the one decision that causes more investor stress than any other.
Just when you’ve spent months analysing the current market, you’re forced to make a choice based on analysing a future market. With multiple variables in play and many economic factors out of your control, even the experts will get this wrong regularly.
The decision to fix or go variable is always up to you the individual, there is no formula to obtain an answer. Simply put, you need to understand your current and future financial needs to provide the best answer for you. What right for your friends may not be right for you.
Fixing your mortgage gives you certainty. It means you know exactly how much you must repay each month. This can be incredibly important in the first 2 years as you get your finances and household budgets back under control.
Fixing looks even better if interest rates start rising after you’ve taken out the loan. The higher rates rise during that fixed-rate period, the more you save. Not to mention the kudos you get from your friends for being so smart!
Anyone who fixed in early November would be feeling good: since then, the average variable rate has increased from 4.56 per cent to 4.90 per cent.
That trend is likely to continue, for two reasons. First, the next move in the cash rate is likely to be up. Second, APRA is likely to further tighten the screws on investors.
Of course, shifts in economic policy can change quickly, so neither of those events is guaranteed. That’s why you should always consult a professional before taking out a mortgage. Your broker is aware of upcoming bank movements and can help steer you into the best product. Remember a mortgage is not about today it’s about the next 2-5 yrs. minimum.
Just as fixing can make you look smart when rates are rising, you can equally look foolish when rates are falling. The lower rates fall during that fixed-rate period, the more you lose.
That might seem irrelevant now, given that most experts think interest rates will keep rising. However, an unexpected domestic or international shock could change everything. These could include International tensions, falling job rates, further stagnation of wage increases to name a few. Fixed loans generally come with fewer features such as offset accounts or redraw facilities. Also, many fixed-rate loans won’t allow you to make extra repayments and you will incur break fees if you wish to close the loan early in order to re-finance.
If you’re finding it too hard to weigh up all these pros and cons, there is a third option – you can back both horses by splitting your loan. Most products will allow at least two splits.
Splitting is when you divide your mortgage in two, with one part fixed and the other part variable. You can split equally, but you don’t have to. So, you might decide to make 30 per cent of your loan fixed and 70 per cent variable; or 60 per cent fixed and 40 per cent variable.
Technically, you’ll be taking out two mortgages. This can work to your advantage if the fixed-rate loan doesn’t have offset or re-draw, but the variable loan does.
Of course, if you split your loan, you not only sign up for all the advantages of variable loans and fixed loans, you also sign up for all the disadvantages.
At the risk of stating the obvious, this is a complicated decision, so it’s a good idea to take professional advice before signing on the dotted line.
Consult the team at Launch Money on 1330 925 081 to confidentially discuss your options.