The property market is still in a gingerly stage; mortgage rates are at a low, and people may be tempted to change their mortgages and lock in on a fixed rate.
But is it always a good idea to do so?
Sure, locking into a fixed mortgage or investment loan gives you the advantage of knowing what your financial obligations will be for a pre-determined period and plan accordingly. This is a good strategy if you want certainty for your cash flow commitments- especially if you are sure interest rates will likely rise significantly.
However, fixing your interest rate is not always the right decision. Here are instances to consider first:
- Are you going to need the equity on your property for another investment during the period?
During the period of your fixed mortgage, you may need to access the equity to invest in a different financial obligation. The price won’t come cheap as your mortgage lender will charge you for breaking commitment. Unless you are sure the revenue from the new investment will offset the costs, accessing equity is a bad idea.
- Are you going to sell your property during the fixed loan period?
You never know the future, there might be an attractive opportunity available or a relocation plan, and selling your home is the next step. Unfortunately, mortgage lenders have penalties for breaking loan commitments, and it might cost you a lot. Before you rush to fix your interest rate, be sure of your relocation plans for the period.
- Will you need an offset account?
This is a transaction account linked to your loan. With an offset account, you can credit your loan occasionally to balance it and reduce interest payable on the loan. However, most fixed rates loans don’t permit an offset account. If you need one, don’t fix your interest rates.
- Opportunity for extra loan repayments
Some people are comfortable paying off their fixed interest rates as stipulated, but there are times when you’ll may want to pay more than your regular rate for the term. However, many lenders have limits to the extra amount you can pay. Having strict limits on your loan can be a bad idea at times like this. In order to avoid being stuck, consider making a part of your mortgage variable and benefiting from an offset account.
- When you can benefit from variable and fixed rates
If you are expecting a tidy sum that could be used to offset a bulk of your rates in the near future, consider getting a balanced fixed and variable loan. If you have one loan, you could split it into fixed and variable parts for that much-needed flexibility. While you offset on end, you maintain fixed payments at the other.
- When loans drop further
You don’t want to be that person who locks into a fixed rate mortgage only to find out the rates have dropped lower again. Before you rush into a commitment, study the market and be sure of the projections. Many people have been left disheartened because rates turned against them.