The option of a fixed rate loan vs a variable rate can a difficult decision.
The mortgage world and the property market are such dynamic and evolving areas, sometimes a constant is just what is needed. When choosing the structure of a home loan, the topic of variable or fixed rates is one which is very important. Clients will ask us, should we fix? Or should we keep the loan variable? And the answer is… it depends.
The variables (get it?) of the property and the client in question can influence the answer to that question. Some of the reasons to fix or not to fix are as follows:
1) Stability – Without doubt, for the duration of the fixed rate period, you can be certain of the repayment about. This can be good for general budgeting needs or if you want to take advantage of a repayment level that is comfortable for your lifestyle.
2) Rates – Currently, we are seeing some of the cheapest rates that have been available in years. For example, we currently have a 2 year fixed rate available for 3.69%. It’s also important to realise that on the flip side, during the fixed period, a variable rate may reduce to below the rate that was fixed in.
3) Future plans – Generally a fixed rate period ranges from 1-5 years. During the fixed rate period making alterations to the loan can be costly. For example, if the property was sold and the loan was paid out, the exit fees could be quite large.
4) Extra repayments – Have some spare cash that you might want to add to your loan payments? Some fixed rate products will have limits on how much you can pay on top of the repayments. Some clients who get salary bonuses for example, may find the extra repayment limit inconvenient.
5) Purpose – Is the property owner occupied? Or an investment? If it’s an investment, would there be a need to change lenders to take advantage of a new valuation? Would selling the property help add to your property goals, would another lender’s servicing policies aid your ability to purchase more? A fixed rate may limit the freedom to change lenders.
6) Features – With some lenders, the features available for a fixed rate product are limited compared to the variable option. For example, some lenders do not have an offset account with their fixed rates, some allow an offset account (but it isn’t fully offsetting the loan) and there are a small number of lenders who do allow for a 100% offset account on a fixed loan.
Blend – Also, it’s an option to use a blend of variable and fixed rates in your loan structure; for example, a 50/50 split of fixed and variable. This way the fixed portion provides stability but the variable portion allows for extra repayments, and the use of an offset account.
As you can see, there’s quite a lot to think about when choosing fixed or variable.
One thing you can lock in with no worries is a Peasy broker, who will be able to guide you through the benefits and the drawbacks of a fixed rate structure – so get in touch today to find out what best suits you.