Is it time to fix your loan?

With interest rates at 30-year lows, many property investors and home buyers are enjoying lower interest repayments on their loans and are tempted to lock in to a fixed mortgage rate. Looking at one of the popular mortgage comparison websites, there are three-year fixed rate loans advertised at 3.99 per cent. That’s 0.35 per cent lower than the (still very low) best variable rate loan featured at 4.39 per cent.

Is it about beating the banks?
As it involves a bit of guess work on the part of banks, they have armies of analysts and statisticians who make projections and carry out modelling to come up with the fixed rate they offer. There is a general perception that you will never get the best deal as “you cannot beat the banks”. I think the issue is more about the borrower’s choice, which may or may not be attractive based on his/her personal circumstances. For example a three-year fixed rate at 5 per cent might be attractive to someone on a budget due to maternity leave as it would give this person certainty until the maternity leave is over. A single person would not be interested in such a rate, but might be opportunistic and fix at 3.99 per cent on the basis that “it could not possibly get any lower”. So fixing could be a win-win situation: the bank makes a profit (which they make on a variable loan product anyway) and the borrower gets peace of mind.

Early repayment penalties
Countering the security of a fixed loan is the inflexibility. There are usually heavy penalties for paying out a fixed loan early, and disincentives to make extra repayments ahead of the loan. You will have made your decision knowing all of this, but what you don’t know is what life has in store for you. You just can’t expect the unexpected. Few people can look back three years and say, “Yes, my life is as predicted, three years ago – same job, same family and financial responsibilities”. If you are one of the few confident of how your situation will be three years down the track, then perhaps a fixed rate loan is for you.

It’s not all or nothing
Of course, you don’t have to fix the total amount of your loan, or fix all the loans in your portfolio. You can fix a percentage of your loan and keep the balance at a variable rate. A good mortgage broker can help with the various permutations and show you results of differing scenarios. As with any element of property investing, if in doubt seek professional help.