Don't get burned by fixed rates
With the RBA now looking set to increase rates many people tend to think about fixing. But before you do anything there are a number of issues and risks you need to consider.
Fixed rates are much higher
3 to 5 year rates are sitting around 7.5% to 8%. There are still variable rates below 6% down to around 5.72%. If you locked in at 7.5% you would be locking your repayments in at 1.78% above what you could be paying.
But here's the real catch, for you to break even rates would not just have to increase to 7.5% they would actually have to move beyond this. Whatever margin and time period variable rates remained below 7.5% the same margin and time period would need to occur above 7.5% before you broke even. In other words rates may need to move to 9.28% before you break even.
No one actually knows what will happen
Recent history has shown how difficult the movement of rates is to predict. Remember it was only at the start of February that all the experts said it was virtually a forgone that the RBA would increase rates. But nothing happened. So trying to pick the market carries it own risks.
Penalties can be into the thousands if you have to exit a fixed rate loan at the wrong time. Remember the timing of exiting a loan may not be of your choosing
Loss of flexibility
Generally there is limited scope to make large lump sum reductions during fixed period - eg you could be on a low rate but can't pay off the loan any faster . Also generally no access to redraw - what if you need those funds for a rainy day?
What if you require extra funds and the bank says no. You might be forced to refinance and get a nice big penalty on the way out. A realistic proposition in the current market with lenders tightening their policies.
SOLUTION.Why not have a fixed rate without fixing? HUH?
Rather than locking into a higher rate today why not just stay on variable, work out what your repayments would be on say 7.5% and just pay extra into the loan. Paying extra into the home loan will assist in paying it off faster and you have already prepared yourself for potential increases.
Please call us on 07 3849 9822 if you would like to review your options. Ask for Lance or Greg.
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The information provided is general in nature only and is not a substitute for independent professional advice. We disclaim liability to all persons or organizations in relation to any action(s) taken on the basis of this information, or any loss or damage suffered in connection with that information or material. You should make your own enquiries before entering into any transaction on the basis of this information.