November 15, 2018

To fix or not to fix? THREE questions you need to consider before locking in your home loan

It’s the time of year when many professionals in mining and resources are preparing to move house before taking up new positions in 2019. It’s also the start of the silly season, which brings a host of additional demands on your time, so that when it comes to setting up (or reviewing) your home loan, it can be tempting to take the first that’s offered. May I suggest: DON’T!

Here are THREE questions you need to carefully consider before locking in your next home loan.

But first, it’s important to know that in recent months the banks have increased their rates despite the official cash rate from the Reserve Bank of Australia (RBA) remaining stable, and there’s speculation about a rate rise in 2019.

In this context, it’s understandable that you may be considering fixing the interest rate on your new home loan (or changing your existing loan to fixed).

My view is not to rush in, but to carefully consider the pros and cons of fixed rate vs variable rate in relation to your individual circumstances. You need to make an informed decision about the type of home loan that’s most appropriate for you and your family and its suitability for your future plans.

To fix or not to fix

In the simplest terms, the interest rate for a fixed loan does not fluctuate during the specified fixed rate period. By contrast, the interest rate for a variable loan varies with market interest rates.

Your answers to these THREE questions will help you choose between fixed and variable:

#1 Are you likely to make additional loan repayments or sell the property in the short term?
If so, there may be penalties if your loan is fixed.

#2 Do you (or are you likely to) regularly use an offset or redraw facility?
If so, be aware that these features may not be available on a fixed loan.

#3 Are you prepared to pay a slightly higher rate to secure a stable loan repayment?
If so, a fixed rate loan may suit you well, but you should consider your longer term plans.

Key benefits of a fixed rate loan

Your repayments will not change during the fixed rate period, enabling you to manage your cash flow and budget confidently for other expenses. You will also be able to fix your entire loan or just part of it, which gives you some flexibility in how you service the loan over time. And, a fixed rate loan provides insurance against rate rises that would otherwise increase your loan repayments.

Key considerations for a fixed rate loan

Making additional loan repayments may attract penalties. Penalties may also be incurred if a fixed loan is paid out during a fixed rate term. And just as your repayments don’t increase if interest rates rise, with a fixed rate loan you will also not receive the benefits of lower minimum repayments should market interest rates fall.

Finally, it’s important to understand that certain loan features may be excluded from fixed rate offers. You may not be eligible for a redraw facility, which allows you to borrow money you have already repaid on the loan. An offset account may also be excluded depriving your of the opportunity to reduce the interest payable on that loan.

I’ve specialised in lending for over 20 years, and my service provides options that are an arm’s-length from dealing directly with the banks and lending institutions. While interest rates are important, so too are the lending conditions and clarity around the fine print is invaluable for making informed decisions. This is where I can help you achieve the best lending option for your circumstances.

If you would like to discuss your home loan or have any other questions about finance and lending matters, please contact me today at Resources Unearthed. Please phone +61 (0)7 3007 2000 or email contact@resourcesunearthed.com.au

Richard Loveday helps executives, professionals and business owners in mining & resources to structure finance and lending for achieving lifestyle, wealth creation and business goals. He is an Authorised Representative of Astute Financial Management Pty Ltd, ABN 59 093 587 010 and Australian Credit Licence Number 364253. 

 Resources Unearthed is a solutions hub that provides integrated financial, legal, property and accounting & business advisory services for executives, professionals and business owners in mining & resources.

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