Every day home owners ask the same question when choosing between a variable interest rate or a fixed interest rate…
“Should I fix my home loan?”
If you’re like most people, you hate losing money and would love to save a few bucks off your loans.
The funny thing is, about 9 out 10 people I ask don’t actually know their own home loan interest rate… But of course, you’re not one of those who’s ignoring the fact that your bank might be dipping their fingers in to your cookie jar, are you? 😉
Should I fix my home loan?
Start by asking yourself these 4 questions… And then decide whether a variable interest rate or a fixed interest rate is best you.
1. Would higher repayments stress you out?
If higher repayments will cause you some BAD stress – it’s simple… Consider fixing at least a portion of your loan.
If you’re the type of person who’s really cautious when it comes to choosing a fixed or variable home loan – this is probably you.
Stressing out when rates go down if you’re locked in to a fixed interest rate can be just as painful.
Do you remember why you made the purchase, or a planning the purchase?
Owning your home or investment is supposed to be a GOOD move for you and your family.
It was a decision you made to improve your happiness (either now or later).
Therefore, if interest rate increases will cause you stress, then do something about it now. While you can.
The risk of losing money is the highest, when you are forced to make a change.
Deciding to make a change after rates have already moved can be costly (selling at the same time everybody else decides to – or switching the variable interest rate to a fixed after the fixed rates have already jumped up).
For every 1% the interest rate increases – that’s an extra $1,000 per year ($20 per week) for every $100,000 you owe on your mortgage.
For a $500,000 mortgage you’ll need to find an extra $5,000 per year for just a 1% increase!
2. Do you expect your situation to change in the future?
There’s a lot of things here that could impact whether you choose a fixed or variable home loan.
Some examples are:
- You’re planning to have a baby, so want to insure against interest rate rises (because your income may reduce).
- Have you got a young family? Perhaps all your kids will be off to school in 3 years, so your income will increase. If so, consider a fixed interest rate until then.
- Maybe you’ve been managing on single income and all that’s about to change (due to a partner studying at university or at home looking after kids which are about to start school). If this is you, then keep yourself a variable interest rate loan so you can make loads of extra repayments.
- Got an investment property already paying for itself and planning another? Consider a fixed interest rate for this one, and an alternative strategy for the next.
- Are you retiring soon? Perhaps you want to keep a lid on the cashflow while you load up on super (if it’s tax effective to do so).
3. Have you got a lot of debt?
If your debt level is high, any rate movement (up or down) makes a really big difference to your cashflow.
In these situations you should consider a fixed interest rate for a considerable portion of your debt. Give it a good hard think, analyse how rate movements would impact your personal situation.
Use this loan repayment calculator to see how much your repayments will change.
Look in to your crystal ball and consider a move of 2-3% for the variable interest rate.
Would that impact your entire lifestyle or cause stress and hardship?
4. Do you like certainty for your investments?
If you’ve got a few investment properties, it’s a good idea to have a balanced portfolio when it comes to balancing your risk of interest rate movements.
But, a lot of the really big investors I’ve dealt with over the years, really like to lock all of their rates for 3-5 years.
That’s of course always a personal decision – but it seems to be more common with those clients I’ve had that have a lot of properties (either residential or commercial).
Locking interest rates for investments provides certainty around the return on that investment, so you can concentrate on the important things in life (whatever they are, for you).
How to switch to a fixed interest rate
You should be able to switch a variable home loan to a fixed home loan for between $0 – $300 (some variable products have a nil switch fee).
Nowadays, you can often make the switch with a phone call to your bank.
However, there are really big differences between banks.
So if you are going to fix, it pays to get your rate double-checked.
0.5-1% differences between banks are common (if you fix for 5 years at 0.5% too high, that’s actually 2.5% of your loan amount of the five year period). Try this loan comparison calculator and select fixed rate option to see the difference over the fixed term.
Should I fix my home loan now?
Nobody really knows if you’ll be better off in the long term choosing a fixed or variable home loan. You’ve got to find the right balance for you.
We are not allowed to advise you to choose a fixed interest rate or a variable interest rate, you have to make a decision based on your situation. We just want to help you find the right structure for your situation.
Who to talk to?
Ping a message in our chat box and ask “should I fix my home loan” if you need some more help or want an expert to talk to.