One question you might be wondering is whether to lock in your repayments by switching to a fixed rate mortgage. There are pros and cons, so here are some important facts to consider before you make your decision.
- Fixed Rate Loans May Help If You’re On A Tight Budget
There are two key benefits to fixing your mortgage rate:
- You know exactly how much your repayments will be over the fixed-period;
- If interest rates increase during the fixed period, your mortgage rate won’t increase.
Nick Georgiou is a financial counsellor working with the National Debt Helpline.
He says the predictability of fixed rate mortgages can be particularly helpful for first-home buyers and people on tight budgets.
“Knowing that your fortnightly or monthly repayments are going to be the same can make budgeting much easier,” he says.
- If You Change Your Mind, You Will Have To Pay A Break Fee
If you need to switch out of a fixed rate loan, you’ll likely need to pay a break fee. And they can be significant.
Depending on your loan size, interest rate movements and your loan term, these fees can easily reach thousands of dollars.
“If there’s a hint that you may consider moving homes or if you want to change loans, keep it variable because you don’t want to pay that fee unless you absolutely have to,” says Adrian Willenberg, a mortgage broker based in Melbourne.
- Fixed Rate Loans Often Have Limits On Extra Repayments
Most fixed rate home loans limit your ability to make extra repayments.
Typically, loans will allow for a certain amount of extra repayments each year or over the term of the loan. Once that limit is exceeded, further repayments attract fees.
If you are concerned about the repayment limits, but still want more certainty over your repayments, one option is to split your loan.
“Let’s say someone is borrowing $500,000. They might choose to put $350,000 in a fixed rate loan, and leave $150,000 variable,” Mr Willenberg says.
“That way they can keep making extra repayments into that variable loan portion.”
- Fixed Rate Loans Often Have Limited Features
If you love to use your offset account or redraw facility, keep in mind these features are less common with fixed loans.
Sometimes they will be available for an extra fee, in which you case you really need to weigh up the benefits versus the costs.
Data Courtesy: www.abc.net.au
Regards: MLF
