Thinking About Fixing Your Interest Rate? Read This First
Following the recent election in the US, and the unlikely result, there has been a movement in the US bond markets that has changed the longer term funding outlook for Australian lenders. So much so, that a number of lenders have already increased their fixed interest rates, especially looking out past 3 years. In some cases fixed rates for 5 years went up as much as 60 basis points (or the 0.6 in a 4.6% interest rate). Rates are hard to make sense of so to make this real if you had a $500,000 loan this could mean you are paying $175 more a month and would spend over $19,000 more over a 5 year period.
Fixed rates on mortgages have been at historical lows for the last year, and with a move by a couple of lenders back up we have seen a lot of enquiries about whether to fix and how much.
You can run your own calculation on our highly accurate and flexible refinance calculator and if you need help considering your own situation you can either run highly accurate product searches or chat to our team just about any hour of the day.
Whether to fix?
There are really two reasons you might want to fix your rate:
- You are trying to beat the system (i.e. you are trying to pick when rates will bottom out)
- You are trying to ensure certainty of at least some if not all of your payments for a reason specific to your situation
We’ll quickly deal with 1.
Trying to beat the banks (in general) in terms of fixing ahead of a movement up in general variable rates is a bit like going to a casino. It feels great if you do ever get it right, but the deck is stacked in their favour. They have better research and insights on their own cost of funding and likely future costs (and their fixed rates reflect this, as we’ll discuss later) and they also control both their variable and fixed rates. If you get it right, it’s great. If not you either lose (pay more than you would have by staying variable) or if you try to refinance early you pay economic costs, basically the difference in interest you would have paid to them.
Fixing to ensure certainty should really be your primary motivation when considering fixing some or all of your mortgage, and as with most things the best option will depend on your situation and what you’re trying to solve for.
There are 3 key factors to consider when looking at fixing your loan
- How sensitive you might be to a rate rise (i.e. could you afford it)
- How much excess cashflow you have which you could use to pay down your mortgage faster
- The difference between variable and fixed rates
Sensitivity to rate rises
In the previous decades we have seen mortgage rates well north of 7% so an exercise every person with a mortgage (or considering one) should do is think, “How much would my repayments be if rates went up by 1 or 2% – and how would my lifestyle be impacted?”. The impact could be as ‘little’ as less savings through to cutting out on major spend to major impact on lifestyle through to financial hardship. When lenders (and advisers like uno) look at your ability to afford the mortgage they tend to use a minimum servicing rate of 7.5% to determine borrowing power. Basically they assume the rate of the loan they are making to you is going to be 7.5% even if it’s not. In theory this means you should be able to afford a rate increase back up to those levels but the reality is we get used to a certain lifestyle based on a certain income that has commitments (such as loan repayments or other expenses) and if those change, making changes elsewhere can be tough.
In short, if through looking at your finances (income, spending, debt, desire to save) you can see that an increase in rates is going to have a big impact on your lifestyle then considering fixing is a worthwhile exercise. We’re yet to build a ‘should I fix’ calculator for customers but our experts can run these calculations for you free of charge and talk about your options whether your purchasing or refinancing.
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Story originally published on unohomeloans.com.au 2nd December 2016
Founder & CEO, uno home loans
Vincent Turner is the Founder & CEO of uno home loans - a digital mortgage service that gives customers the power to search, compare and settle a loan online. Get started at unohomeloans.com.au.
Published 15 March 2017