For the first time in 13 years I’ve just fixed one of my own loans. There was a window of opportunity in late 2008 when I scrambled to advise my Platinum Members when rates dropped very briefly to 4.99%.
Those who followed my advice have saved a fortune, locking in just $500K would have save you $11,000 pa on today’s pro pack rates, that’s the value of being a Platinum Member!
It is unusual for fixed rates to be lower than the variable rate, but this is one of those usual times when both 3 and 5 year fixed rates have dropped well below the prevailing variable rate with some as low as 6.29% for a 3 year term and 6.39% for 5 years although most are around 6.69%, that's up to 1.5% lower for the 3 year term, rare times indeed.
What is the up side to fixing your rate?
- The 3 year rate is about 0.8% below most prevailing pro pack rates, that’s a saving of about $4000 pa on a $500,000 loan or about $2,000 pa on the 5 year term
- You have rate certainty that your interest costs won’t increase over the term
- Provided you have the equity you can still apply for additional funds
What is the down side?
- You lose flexibility as you are locked into that lender for the term of the loan
- The loan must be fully drawn so you lose any available credit you may have on the loans to be fixed
- If rates fall you are locked in at that rate
- If you exit the loan before the end of the term and rates have dropped you may face penalty fees
What to consider:
- As most, but not all lenders, limit the amount fixed loans can be reduced or offset you need to consider how much you can pay down/off over the term from your cashflow, an inheritance etc
- To save interest over the term of the fixed period the average variable rate needs to be higher than the fixed rate for more than half the fixed term
- The experts advise people to lock in closer to the lower end of the cycle range, not the high end
- If you have any plans to sell the property within the fixed term, be wary of locking in
- That your circumstances won’t substantially change within the term
- How much of your lending you should lock in and the term of the fixed period, for example you should not lock in a transactional loan account such as your 'Expense Account'
- Typically deductible loans should be locked in before non-deductible so you can pay your N/D loans down first
I can’t recommend or advise you to fix or not to fix, not even RBA chief Glen Stephens knows where rates are headed over the next 3 to 5 years because there are so many factors that affect rate movements, however, I feel a sense of responsibility that if I’m fixing some of my own loans for the first time in many year I should raise the issue with you so you can make your own informed decision
What to do if you do decide to fix:
If, after considering all the circumstances, it is best to stay with your existing lender the process usually should be quite straightforward requiring only a “switching” form. Give us a call and we will advise you accordingly.
If you want to switch to a lender (eg for a better rate) then you will need to call us today on 03 8621 8484 and we will make the arrangements