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To fix or not to fix?

Whether to fix your home loan interest rate is a question that faces many homeowners and mortgage payers. When interest rates are falling, you don’t want to miss out on securing a super low rate. But when is the best time to lock it in? If you do it too soon, you could see rates continue to fall while you’re still paying last year’s higher rate. Some people locked in their rates at 7% plus five years ago, while the discounted variable has slid down to just over 4%. If you do choose to fix your interest rate, you then need to decide how much of your loan to have fixed and how long to fix it for. And you thought that picking the right house was confusing enough!

There is no one size fits all formula for if, when and how much to fix your home loan rate. But it’s a decision that could have a significant impact on you financially, so it’s worth considering the most suitable structure for your personal situation. Below are a few considerations to help understand what is best for you.

When is the best time to fix my loan?

The best time to fix is usually before you think it’s the best time to fix. If you’re thinking of fixing because you feel the rates have bottomed out, it’s likely that the number crunchers at the bank are a step ahead and already starting to push up fixed rates. The banks never want to get caught out with people fixing just before rates go up, so they raise their rates prematurely in expectation of this. But there are of course never any guarantees, so you are exposed to the risk of making the wrong decision.

Should I fix all or just a portion of my loan?

You can fix anywhere from 1 percent to 100 percent of your loan. How much you should fix depends on your personal circumstances as fixing will likely remove flexibility. A variable rate home loan allows you to repay or redraw funds, whereas in most cases a fixed home loan rate will not. It’s therefore a good idea to consider how much of your loan you could pay off over the given time frame. For example, if you can pay off an extra $2,000 per month, over three years you might be $72,000 ahead on your home loan so it’s important that you keep this proportion variable to save on the interest. Similarly, take into consideration any extraordinary payments or windfalls, such as a sale of an asset or a bonus from work.

How long should I fix my loan?

You can fix for any number of years. Currently, three years is most popular as it offers the most attractive rate versus length of commitment. How long you should fix for once again depends on several factors. Think about what life events you anticipate in the future. If you’re in a stable period of your life and you’re worried about rising interest rates, fixing for a longer time frame can give you the peace of mind. However if you think you might sell your house, increase your repayments, or aren’t concerned about rates rising too much, then a shorter-term period will probably suit you better.

You can still make some changes to your loan even if it’s fixed

A common misconception with fixed rate home loans is that once you’ve fixed your loan, it’s set in stone and you can’t make any changes. While an element of this is correct in that it’s unlikely you can change the fixed portion of your loan, it’s entirely possible for you to restructure your debt. Providing you have the equity, you can either increase your variable component or take out an additional variable loan to pay for expenses such as renovations or a new investment into shares or property. The fixed portion of the loan will remain as it is, but you will have an additional loan on top of this, providing you with the extra funds that you need.

The decision to fix all or some of your loan is going to be personal to you. It could be based on fear of rate changes and the desire to have a stable and predictable repayment amount; or it could be an opportunistic move in the anticipation of rates rising and trying to lock in something cheaper. Understanding your strategic needs and goals is a key ingredient in finding the right structure for you.

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