How do I know which fixed rates are right for me?
When it comes to financing your home, how do I know which fixed rate, and at what fixed term will work best for me?
Home loan and finance specialist; Ben Graham from Mortgage Sure shares some words of wisdom when it comes to picking a fixed rate for your home loan.
To start simple: what is a fixed rate?
A fixed rate home loan means the interest rate for the borrower is fixed for a certain period. This fixed term period can be anywhere between six months to five years. At the end of the term, you can choose to re-fix again for a new term, or instead move to a floating interest rate.
The key advantage of opting for a fixed interest rate is that it offers the borrower great certainty when it comes to budgeting and knowing exactly how much their repayments will be. This means, no surprises. One thing to still keep in mind is whilst we encourage paying off your mortgage faster, be mindful that if you repay your loan early, there can be early repayments fees to pay. We go in depth about this a little further down.
How do I choose the right fixed term for me?
We consider a number of factors when deciding which fixed rate period is right for each client. And trust us, it certainly differs depending on your goals, lifestyle and financial position.
Some of the common factors can include:
- How long you intend to own the home.
- The health of interest rates – are they trending up or down?
- Lifestyle factors, such as growing families or changes in employment or income.
- A client’s personal tolerance for risk.
For many of our clients, we often recommend splitting your home loan across different fixed terms to spread the risk. Of course, we appreciate each personal situation is different which is why we take the time to understand our clients circumstances to ensure their home loan rate and fixed term are structured in the best possible way.
Early repayment costs or “break fees”
Sometimes you’re in a position where you want (or need) to exit a fixed rate term early. This could be for a number of reasons, such as, selling your home or perhaps having a desire to secure a lower interest rate than you’re currently paying.
When breaking a fixed loan contract, the bank reserves the right to charge an early repayment or break fee. In simple terms, the break fee should be the difference in interest costs between the rate you’re fixed at and the current market rates.
Seems simple… but in reality, there’s more to it than that! Break fees are calculated daily based on wholesale rates, meaning they can change significantly day to day. In reality, the lower the current rates are, when compared to your current fixed interest rate, the higher you’ll get stung with break costs. On the flip side, this can mean significant interest savings making breaking the fixed term contract a worthwhile exercise. Before breaking any contract or making changes on your home loan – ensure that you speak to a professional for guidance to ensure your decision is wise.
Different fixed interest rate scenarios
We commonly get asked which fixed rate term is the best to go with. The simple answer is (unfortunately), there is no ‘right’ answer as such. In saying that, to assist your decision, we can quickly calculate an approximate figure of the maximum amount the interest rate can increase, before you (the customer) loses out. This is commonly referred to as the break-even rate and will help you assess the risk between the different terms.
Our clients goals and risk tolerance should be the key factors that determine what interest rate and term they choose. The break-even rate simply provides a fair way of comparing interest rates.
Understanding which fixed term is best for you can sometimes be a tricky one. That’s why as financial advisers we are here to help you, every step of the way. If you’re on your way to home ownership, or perhaps already have a home loan but are thinking of changing your terms – seek our professional guidance to provide you with assurance before making any large loan changes or decisions.
While we’re home loan experts, our blog posts are for general information purposes only and are not intended as financial advice. If at any stage you need personalised advice, get in touch on 06 8788 4444 or contact Ben or Mark.
