2014
Finance expert Tim Wong answers a reader’s question on whether it’s too late to fix their mortgage rate.
Question: I’ve been thinking about fixing my loan but never got around to it. I’ve also read there might be a couple more rate cuts in the next six months or so. Do you think it’s still worth fixing my loan? What are the risks and advantages of fixing now? What do I need to consider before fixing my loan? I’m not too worried about repayments, but some savings would be nice.
Answer: Rates are now at their lowest point in recent memory, so it’s certainly a prime time to take advantage of lower repayments and lock in some certainty over the fixed term.
Some of the major lenders’ fixed rates have fallen by as much as 3–3.5% in the past five years to their current levels (noting some lenders may also offer further discounts on their rates). However, it is difficult to predict if rates will fall any further – so what to do?
Your decision should be based on your specific circumstances and how they might change during the proposed fixed-rate period.
But even if you believe rates have bottomed out and the time is right to fix your rate, there are still some additional factors to consider.
The main drawback with fixed rates is they’re often less flexible and may restrict you from restructuring your finances during the fixed-rate term. So if your circumstances change, your loan may not, which could make it difficult if you need to sell your property or relocate.
Additionally, if you’re an investor, you could lose a lot of loan flexibility if you fix the whole loan, limiting your options should you wish to refinance to another product or lender. To enjoy the best of both worlds, many people fix a portion of their loan and leave the rest variable to provide the required flexibility, as most lenders do not provide offset facilities for fixed loans.
If you have already decided to fix your whole loan, there are some things you should be aware of. Some lenders permit some extra repayments to be made on their fixed-rate loans, but you’ll be prevented from paying the loan out entirely without having to pay a break cost.
You should also enquire about the comparison rate, as the actual rate can vary between lenders.
Many lenders offer a ‘rate lock’ option, which guarantees for a period of time (the rate lock period) that the rate at application will be the same at settlement, even if rates have risen in the meantime. If your loan doesn’t settle within the rate lock period, you lose the benefit.
The rate lock fee may be a flat fee or a percentage of the loan amount. Weigh up whether the fee is worth paying if the cost of extra repayments could be less, even if rates do go up. Generally, repayments will be less affected over shorter fixed terms and at lower amounts. If the rate lock fee is charged up front, you will need to have it ready. Some rate lock fees are non-refundable, even if your loan application is declined or you withdraw it.
Before entering into a rate lock agreement, find out what rate applies should there be a rate decrease before settlement. You may still get the higher rate that you are locked into.
Here’s one last thing to consider: a fixed-rate loan isn’t all about setting and forgetting.
Your lender should notify you when your fixed-rate term is due to expire. Usually they will let you know your options: to either choose a new fixed-rate term or renegotiate your loan to another rate or type. However, if you fail to provide new instructions and do nothing, it’s most likely your loan will automatically roll over to the prevailing standard variable rate, which may be considerably higher than you could otherwise get. You’ll need to remain on top of things when your fixed rate is about to expire.
We see it as a good time to consider fixing. We can’t predict whether rates will go any lower, but we feel there is less of a downside risk in fixing at the current lower rates than at the higher historical rates.
Remember, everyone is different, so weigh up the pros and cons of fixed versus variable as they apply to you, and don’t base your decision solely on the rate.
Disclaimer: The views provided are of a general nature and should be considered as general information only. This is not financial advice and it is not to be acted upon without advice from a qualified professional who understands your personal circumstances.
