Should you fix your loan rate?
Fixed and variable rates will always cause disagreements, some people swear by variable rates, and other are convinced fixed are the way to go. But should you fix your loan rate?
The short answer is probably not. There are generally two types of people who will fix there rates, those that are afraid of risk, and those that are carrying way more debt than they can realistically afford. If even one small interest rate rise would force you to sell your home, you should definitely fix your interest rate. If you fix your loan out of fear, it’s likely you are paying more than you need to; it’s how banks make such huge profits. For the rest of us, you should heavily consider a variable interest rate, and here’s why.
Why you shouldn’t fix your home loan rate
- You can’t make extra repayments on your loan – Most fixed rate home loans either do not allow extra repayments all together, or only allow extra repayments up to a set amount per year, usually $10000. While you could instead put your savings into a savings account, you will be far better off putting your savings into your mortgage; the interest rate you save is likely to be more than the interest rate you could earn in a savings account, plus you avoid having to pay tax on your interest savings, which you would have to do on interest earnt.
- You can’t pay out your loan – You can’t make extra repayments, which also means you can’t pay out your loan if you were to receive a windfall of cash or decide to move house. If you do manage to pay out your loan, you will likely incur a huge penalty which would not make it worth your while.
- There is really not much interest rate risk these days – The days of 18% interest rates are gone; while interest rates may move a few percentage points over the next few years, they are very unlikely to increase too much. The RBA does a fairly good job of keeping interest rates within a narrow range of percentage points.
- Banks offer fixed rates to make money – The banks know what they are doing, and they exist to make a profit, so they are the only winners when it comes to fixed loans. Banks are fantastic at forecasting where interest rates are headed over the next few years, and use this information when they set their fixed rates. You will end up locked into a higher rate than you would have otherwise paid on a variable loan.
- If interest rates do go up, it’s usually because the economy is booming, house prices are rising and there are high levels of employment. If interest rates are rising, it’s pretty likely you can afford to pay the higher rates thanks to the improving economy.
So the next time you are considering refinancing, ask yourself, do you really need to fix?