Interest rates – Do you fix it?
Interest Rates - Do you fix it?
As we emerge from a year where Covid played havoc with our finances, it’s time (if you haven’t already) to re-examine your home loans.
Where some may have needed to take advantage of a deferral of mortgagee repayments, now lenders are requiring them to start again. One benefit of last year was the drop in interest rates. Where 12 months ago many of us were paying around 3-4%, rates have dropped to between 1.7% and 2.5% meaning now is the time to consider fixing part or all of your mortgage.
Refinancing your mortgage now to take advantage of a fixed rate for the next 3 -5 years (depending on your lender) can help alleviate tensions on the budget and make planning for the coming years more comfortable.
Historically, fixing your loan attracted a slightly higher interest rate, but that is not longer the case. Many lenders are allowing customers to lock in a rate lower than the standard variable to guarantee your business for the coming years. While we can never predict the future, current rates are so low that they really cannot get any lower.
So why fix?
Knowing exactly how much your repayments will be for the next few years can help you plan and budget for any changes on your lifestyle. You may have a child starting school or need to go part time for a little bit and the predictability of repayments means you can better accommodate these changes to your financial situation. Additionally, should the rates rise (which they don’t predict to happen in 2021) your repayments will not be impacted.
The only downside occurs where you want to make extra repayments or pay out the loan early if you came into some money or needed to sell the property. Your lender will set a limit as to how much extra you can pay as well as penalise you for ending the term earlier.
Variable home loans are subject to changes in the economy and the RBA’s cash rate. This cash rate is what the RBA uses to control inflation as when the economy is doing well, the cash rate rises as do interest rates. Currently, we are experiencing economic stress due to the impact of Covid so the RBA will be inclined to leave the cash rate as it is to help stimulate the economy into spending again. Till then, we can enjoy lower rates and the extra benefits of a variable loan where you make use of the re-draw facility and an off-set account that will enable funds in a transactional account to lower your mortgage balance and save you some interest.
Although experts foresee that we will be able to enjoy these lower rates for the coming year, it is always recommended to examine your current loan and make choices that are inline with your personal financial plans and needs for the coming year.
Achieving your financial freedom will enable you to achieve your life goals.