Finance Update - To Fix or Not to Fix?

To Fix or Not to Fix - Home Loan Rates

One of the questions we get asked daily is, “Should I fix my entire home loan?”

With interest rates at an all time low, The big 4 banks announced further drops to only fixed rates. 

So what are your options?

Currently fixed rates are up to 0.8% lower than variable rates. Historically if the fixed rates are below variable rates for home loans then this is an indication that the money market is predicting interest rates to fall.

The official RBA cash rate since last week currently sits at .01% which is the lowest in Australian history. The RBA is anticipating significant job losses -  it noted that the cash rate should remain low for quite some time.

From an interest rate point of view – fixing appears to be a good idea at the moment as fixing is cheaper than variable and it's unlikely that variable rates will drop to the level that fixed rates are at now, however we always to suggest to clients to have some of their loan as variable as most fixed rate loans cannot be fully offset.

Before you fix your home loan, consider this:

When is fixing a bad idea?

  • If you need to make large extra repayments to your loan – most fixed rate loans will only allow up to $10,000 per annum before penalties apply

  • If you plan to sell your property in the period where your loan is fixed

  • If you plan to refinance your loan in the fixed period 

  • If you plan on renovating or building 

When is fixing a good idea?

  • The interest rate may be lower than variable (that is the current state of play with most lenders)

  • Makes budgeting easier as you know what your repayments will be

  • Fewer loan features could cost you less in bank fees

  • If rates increase your rate stays the same for the duration of the fixed period

To Fix or Not to Fix - Home Loan Rates

Break fees – what are they?

If you do need to break your fixed rate home loan for any reason the bank will charge you a break fee. 

Banks cannot determine what your break fees are at the beginning of your loan term as break fees are charged on the day you break your loan and will be determined on current interest rates that day. If rates are cheaper than what you are currently paying, and you still have more than 12 months of your fixed loan term break fees can be as high as $50,000 depending on loan size. 

Break fee = Loan amount x Remaining fixed Term, x Change in the Cost of Funds 

The best way to determine the break costs is a simple call to your current provider, or your mortgage broker.

At Sandcastle Finance we can do a cost analysis for you.

Some banks are offering a $4000 cash back so in some instances it may be worth you switching and breaking your fixed rate. 

There is no one solution for everyone. 

The best thing to do is set up an appointment so we can help you figure this out.

Sally Prowse