Are Fixed Rates for me?
This would have to be number one question that I am asked at the moment but there is no simple answer. It’s as difficult a question as trying to work out whether you should be selling shares because there is no simple answer on what is likely to happen.
If I was trying to convince someone that fixed rates are right for them. I would be offering the following arguments:
- You will know exactly what your repayments will be for the duration of the fixed rate period which will allow you to comfortably budget knowing what your home loan repayments will be.
- You will be protected from any increases in the variable rates during the fixed rates period.
On the other hand, if I was trying to convince someone that fixed rates were not appropriate for them, I would offer the following arguments:
- You could be faced with break costs which can be significant if you need to break the fixed rate for any reason. This could be forced relocation with work, a need to refinance, divorce or basically any change in circumstances;
- Interest rates may drop such that the variable rate is lower than the fixed rate that you are locked into and you will end up paying more than you would otherwise have been if you had not locked in the rate;
- There are restrictions on amounts that can be paid over and above your agreed repayment levels under the fixed home loans. These range from a set amount such as $10,000 over the fixed rate period, from a set amount per month or a certain percentage of the loan amount but if you breach these amounts, you may actually get hit with break costs.
There is no simple answer but the following may help you decide:
Are you comfortable to pay the interest rate on offer?
- Do you feel that the variable rates during the fixed rate period will be higher than the rates on offer over the term of the fixed rate period; and
- Are you happy that you won’t need to do anything that may cause the fixed rates to be broken?
If you answered Yes to these, then maybe Fixed Rates may be suitable for you. At the end of the day, the decision is very much a personal one although I am happy to talk it though with you.