Fixed rates have been at an all-time low since late last year. In the last month or so, most lenders have reduced their 5 year fixed rates even lower and it looks like fixed rates are the way to go. Or are they not?
At first glance, a 4.99% five year fixed rate seems very attractive. It leaves you wondering whether you will miss out if the rates are reduced even further. Below are some of the common questions I get asked when it comes to fixed rates.
- Can I fix now and change it later if the rates are reduced further?
No, you cannot do that. Once you fix your rate for a certain term, you need to stick with it. If you want to break the loan during the fixed term, it will cost you – a lot. It can be anywhere up to thousands of dollars depending on the balance of the fixed term.
- Can I have an offset account with my fixed rates?
Most banks let you have an offset account with a fixed rate home loan, but be aware that it will be a partial offset – not a 100% offset that is usually available with variable rates.
- I am going to build my house and want to fix my rate now to secure a low fixed interest rate.
When you choose to build your house, your repayments are generally interest only during construction. This is because money is released in parts as construction progresses – hence lenders usually do not let you have fixed rates until after completion.
- Can I sell my house during the fixed term?
Yes, you can, but you will incur break costs when you pay out the loan earlier than the term (depending on the balance of the term).
- Can I top up my loan (equity extraction) during the fixed term?
It can be done, but be careful not to break the fixed loan to avoid the hefty break costs.
- Can I pay extra into my fixed loan?
Banks usually do allow extra contribution up to a certain limit during the fixed term. As long as you stick to it, you won’t pay any penalty.
- Can I redraw the extra I contribute into the fixed loan during the fixed term?
Most banks do not allow redraw during the fixed term.
- I have the capacity to save $X every year and really want my money to work hard in reducing the interest payable. How do I do it?
A split loan may be the solution. You can have the variable split to match your savings in an offset account and hence enjoy the best of both worlds.
- What are the advantages of fixing my loan?
Budgeting is easy as your repayments stay the same during the fixed term.
Fixed rates may not be for everyone and the decision should be based on your short to medium term needs. Hence it can be worthwhile to consider various factors and even discuss with a mortgage broker before you can make that choice.
Disclaimer: Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a finance professional to consider how appropriate the advice is to your objectives, financial situation and needs.