WITH INTEREST RATES AT RECORD LOWS AND THE BANKS COMPETING FOR YOUR LOAN, THE KEY QUESTION ON EVERYONES MIND – IS IT THE PERFECT TIME TO “FIX” THE RATE OR LEAVE YOUR RATE AT VARIABLE?
The Reserve Bank of Australia reduced the cash rate to a record low of 1% with two 25 basis point reductions the last two months. Record low interest rates coupled with record housing prices across most Australian capital cities have driven Australian’s to consider a home or investment loan for new purchases and for existing loans, many are considering if it is the best time to switch to a fixed rate home loan or continue with a variable loan option.
What is a fixed interest rate and what are the benefits/ drawbacks?
A fixed interest loan allows you to ‘lock in’ an agreed interest rate with your lender. This way you don’t have to worry about the rising and falling interest rates of your loan. Your loan term may be 25 years however fixed interest rates will be for a period of time usually one to five years. They key benefit of a fixed interest rate is the certainly of knowing what the repayments will be on a month to month basis which will assist your cash flow planning.
However there are some drawbacks with a fixed rate loan. Although fixed rates assist cash flow planning, fixed rate home loans often have less flexibility than a variable rate loan arrangement. This includes a restriction on making extra repayments and if the interest rate decreases you miss out. This is countered by an increase in the interest rate which a fixed rate will hedge,
Can I split a loan?
A split loan is possible where a portion of your loan being paid at a fixed rate and the remainder being paid at a variable rate. This type of loan will give you some reassurance in knowing roughly how much you will need to pay each month – whilst also making some financial savings if interest rates fall.
The decision of fixing a home loan comes down to your personal choice and your appetite for risk. Like all financial decisions it may be advisable to speak to a broker – why not discuss your loan with a Redwood Broker?
Ivan Filipovic is a leading SMSF Specialist Advisor with Redwood. Ivan is a Self Managed Superannuation Specialist with over 20 years provides a range of services across all sectors of Self Managed Superannuation, Property and Finance with an emphasis on long term wealth strategies. Ivan is a Chartered Accountant, Financial Planner, ASIC registered auditor, Mortgage Broker, Tax Agent and Licensed Property Professional.