What are the right reasons to fix your mortgage rate?
Aussies are gamblers historically, its said we will bet on two flies walking up a wall if given the chance. There’s a hell of a lot of flies in a Australia, so the opportunities for gambling are numerous! People ask me all the time, “Should I fix my interest rate? I want to minimise my payments over the next 3 years or so!” Careful! This is dangerous territory! Its a little like gambling with your $400,000 mortgage! If you win, you are the smartest and happiest person alive, if you lose… well… Ouch!
Why Fix Your Mortgage Rate
Let me start by stating the worst reason to fix your mortgage rate.
Don’t Fix your Interest Rate to beat the Bank
I know the temptation is there and i’m sure you know lots of people who beat the bank and saved on their interest mortgage rates. They love to tell you whilst cooking sausages on their BBQ, chests puffed out at how they won. I bet you haven’t heard of many people who lost. Who fixed their rates at 8.5% when rates dropped to 5.5%. They are out there! I promise you. The problem is that they have their mouths closed out of embarrassment. They won’t tell you, but they are on the phone to me saying “GET ME OUT OF HERE!!!” I can get them out, but the bank will charge them penalty interest.
The first question I ask is for these people to ring their lender and ask what the break cost will be. This can be nasty, very nasty! One client of mine would have had to pay $45,000 to exit his loan. This is the downside risk! Scary? Yes indeed!
The crux of the issue is this. Bank make huge profits by being good at what they do. Sure, some people lock in their mortgage rates at the right time and win, but the majority don’t. Most times the Banks win. Their Billion dollar profits are part of the proof.
So what are the right reasons fix your mortgage rate?
Fix to guarantee your Cash Flow
You should look at the repayment, say $2,000 per month, and say to yourself, “I would like to guarantee that my repayment will be $2000 per month for the next 3 years. This means that based on my income I can afford to pay it and no increase in rates will affect me for 3 years.”
This is more of a defensive move than an offensive move. You are defending against possible rises rather than trying to beat the market.
Fix your Investment Property
Your investment property is probably the area where you will want the most stability. Particularly if its your first investment property. No surprises please! Your investment loan gives you tax deductions. For this you will be trying to pay off your home first. Fixed loans usually have restrictions on how much extra you can pay off, so leaving your home variable, or at least partly variable is usually a good plan.
Fix when Mortgage Rates are Historically Low
In the past 10 years interest rates have been as high as 10% and as low as 5%. However, they have spent most of their time around the 6.5% – 7% mark. If the rate is around this mark then fixing is historically safe. There is no real way to predict what will happen, but history is usually a strong indicator.
Part Fixed Part Variable
If you were betting on the Melbourne Cup this is like having a bit each way. Follow all of the rules above, but if you are undecided perhaps fix half your loan and leave the other half variable.
Article by James Parnwell
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