Is it time to fix your interest rate?
It is one of the most common questions we get asked. Should I fix the interest rate on my loan?
Below are the things you need to consider and talk through with us before making the right decision for you.
Principle and Interest Home loans
Most lenders offer better rates for Principle and Interest (P&I) repayments. They also offer better rates where your total loan limit is 80% or below the value of your home.
Given the increase in property prices in Melbourne and Sydney over the last few years, there is a strong possibility that if you borrowed more than 80% your debt may now be below that level. If you believe this to be the case, speak to us so we can review your current situation and ensure you are getting the most competitive rate.
If you are thinking about fixing your rate keep in mind the outlook for variable rates over the next 12 months remains relatively steady.
The decision to fix therefore comes down to a few simple questions:
- Do you require certainty of repayment? (which could be for any number of reasons)
- Are we willing to pay a premium (i.e higher rate) for that certainty?
- Can we pay extra into our home loan?
Current fixed rates for P&I Home loans range from slightly lower to slightly higher than current variable rates depending on how long you would like to fix. Each personal circumstance is different so call us to understand the best option for you.
Interest Only home loans
If your cashflow or future objectives enables you to convert to P&I repayments, in most instances this is the simplest way to avoid likely future rate increases.
If converting to P&I repayments isn't an option then look at your fixed rate options with us asap to avoid these likely rate increases.
The one caveat to this is if the home you are living in now is likely to become an investment property in the future. In this instance, there may be a bigger long term benefit by retaining on interest only repayments.
In this circumstance we encourage you to contact us to understand the pros and cons of IO vs P&I.
Interest Only Investment Loans
There is merit in fixing the interest rate on these loans especially if the fixed rate being offered is at the same rate as your current variable rate. In this instance, you would benefit from obtaining repayment certainty and this will allow you to focus on reducing other debt such as a home loan if that is a priority.
If you are in the fortunate position where you don't have any other debt, be it a home loan, personal loan or outstanding credit card debt then considering P&I repayments has more merit now than it has previously, given that better rates are now offered for this type of repayment.
Principle and Interest Investment Loans
It is uncommon for people to be paying principle and interest on investment loans. In some instances, an old home may have converted to P&I repayments after 5 years or an owner-occupied home has now converted to an Investment property as part of an upgrade.
Even with better rates afforded to principle and interest repayments, for those with current home loan debt in most cases, it still makes sense to prioritise the home loan debt and repay only the interest on any investment loan.
If, however, as per above you have no other debt then the decision to fix this rate comes back to how much (if any) extra you are looking to pay off, if you would benefit from the certainty and finally whether the rate being offered is the same as your current variable rate.
In summary, for those of us with interest only investment loans we believe NOW is a time to consider fixing your interest rates. For home owners that decision still comes back to whether or not you have a need for certainty of repayment.
Either way we encourage you to call us to understand your individual options.
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