Thinking of fixing your mortgage? Read this first
When markets are uncertain, the RBA is warning of further pressure on borrowers, and the cost of living keeps rising, it is understandable that many people want more certainty around their mortgage repayments.
One way borrowers try to create that certainty is by fixing their interest rate, sometimes for several years.
Fixing your mortgage can be a good way to manage your budget and protect yourself from further repayment increases during the fixed period. But that certainty can come at a cost.
Here are a few important things to consider before deciding whether to fix your mortgage.
What are your plans for the property or the loan?
Before fixing your rate, think carefully about what you may want to do during the fixed period.
If you are planning to:
- sell the property
- refinance
- increase the loan for renovations
- make major changes to the loan structure
- pay out the loan early
You may end up breaking the fixed term. If that happens, the lender may charge break costs, and depending on market interest rates at the time, those costs can be significant.
Do you want to make extra repayments?
This is one of the biggest limitations of a fixed rate loan.
Most lenders will only allow a limited amount of additional repayments each year on a fixed loan, often around $10,000. If you are planning to pay down your loan faster, or expect to receive bonuses or lump sums that you may want to put straight onto the mortgage, a fixed rate may not be the right fit.
If you exceed the lender’s annual repayment limit, penalties may apply.
Are you actually better off staying variable?
This is the question many borrowers forget to ask.
Banks do not set fixed rates randomly. Their fixed rates are based on what they believe is likely to happen in the market over the fixed period. In many cases, fixed rates move before the RBA even changes the cash rate.
That means a fixed rate may give you certainty, but it does not always mean you will save money.
Sometimes the better option is to stay on a variable rate so you keep flexibility and avoid being locked in.
Final thought
Fixing your mortgage can make sense in the right circumstances, especially if repayment certainty is your main priority. But it is important to understand the trade-offs before making that decision.
The right structure depends on your plans, your cash flow, and how much flexibility you may need over the next few years.
Talk to us today if you would like to compare fixed and variable rates and work out which option is better suited to your situation.