If Rates Rise, Should I Move to a Fixed Rate Mortgage
When considering refinancing your variable interest rate home loan to a fixed interest rate mortgage there are two important considerations to keep in mind. These are:
- The percentage of the interest rate. How much higher is the fixed interest rate to that of your present variable interest rate? How much is it going to cost you change to a fixed interest rate home loan.
- What is the length of term that you will have the fixed interest rate fixed for? (most fixed interest rate home loans don’t necessarily have the fixed interest period set for the whole loan term) They are usually set from one year to 10 years and can be automatically converted to a variable interest rate home loan at the expiry of the fixed term.
If you will be paying too high a fixed rate when compared to the variable interest rate think about it for a bit before committing yourself. If the fixed interest rate period is only to be for a short while then there may be little advantage should the variable interest rate not rise as fast as anticipated. In this case the cost of refinancing into a fixed rate would not be justifiable.
When taking out your home loan you would have considered the movement in interest rates at that time. If at that time you chose a variable interest rate mortgage you would no doubt have been of the opinion that interest rates would have remained steady into the foreseeable future, or you may have anticipated them falling.
If the general interest rate was to fall as anticipated it would be wise for you to seriously consider keeping your repayments at the same level during the downturn and not take the easy option of ‘living it up’ with the extra money you would have at your disposal each month. By keeping your repayments at the same level you will pay more off your interest each month and save a quite considerable amount of interest over the life of the loan while at the same time actually shorten the term of the loan by a number of years.
If rates rise, should I move to a fixed rate mortgage?
If you happen to have a variable interest rate home loan and the general interest rate begins to rise causing you to fear the worst if the trend was to continue, all is not lost. There are answers. First however you must consider the cost of making any changes:
- It will cost you to exit your present mortgage and to take out a new fixed interest rate home loan. All these costs must be taken into account when considering any refinancing changes.
- Fixed interest rate mortgages don’t normally offer you the same features you may be enjoying with your variable interest rate home loan.
- You will not have the ability to pay off your mortgage sooner as fixed interest rate home loans seldom allow for any additional payments to be made.
- Fixed interest home loans can not be linked to an offset savings account whereby you can lower interest rates through your savings in a savings account.
Don’t jump too quickly.
What goes up must come down and interest rates are no different. Be certain that any upward movement is not simply a temporary adjustment being made by the Reserve Bank and that the interest rate is not going to be lowered again in the near future.
With all that said many lenders today do offer fixed interest rate home loans along with many products previously offered only to variable interest rate customers. Many also allow additional payments and redraw facilities. It is therefore imperative that you look around thoroughly and seek expert advice before jumping one way or the other.
A Fixed Rate For the Feeling of Certainty.
Fixed interest rate home loans do offer more certainty than do variable interest rate mortgages simply because the interest charged for the loan will not change during the fixed period no matter how long that term may be. A fixed interest rate home loan has not been as popular among home buyers in the past mainly because of its inflexibility but owing to changes now being made in this area we can expect many people opting on the side of security in the future.
Related posts:
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- Prepare for Rate Rise or Risk Needing a Second Job
- ANZ Three Year Fixed Rate Home Loan
- 30 Year Fixed Rate Home Loan
- IMB Fixed Rate Home Loan
- How to Decide Whether to Break a Fixed Rate Loan
- 15 Year Fixed Rate Home Loan
- Fixed Versus Variable Rate – Which one to Choose?
- eChoice Fixed Rate Home Loans
- NAB Three Years Fixed Rate Home Loan
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