When is a good time to fix?
Whether rates are going down or going up at some point you will probably contemplate fixing your home loan rate. But is it such a good idea?
Do you really think you will beat the bank?
Let's say 3 year fixed rates are sitting around 5.34% and variable rates were 4.8%. Straight away you would be locking yourself into a higher rate. On a $300,000 loan this would mean $1620 a year more in interest.
And here’s the catch people think they are ahead by fixing when the variable rate increases beyond the fixed rate. This is incorrect. Your break even point is not when variable rates reach 5.34%. The break even point is determined by the actual cost of funds over the fixed term. If the loan was interest only your total interest cost over 3 years is $48060. If rates on average remain around 4.8% for the next 12 months and average 5.34% in the second year the rates would have to average above 5.88% for the final 12 months before you come out ahead.
Remember banks are very good at making profits. They don’t set fixed rates on the basis of losing the bet. They are betting you will end up paying more interest under the fixed rate than if you stayed on variable.
Penalties can be into the thousands if you have to exit a fixed rate loan at the wrong time. Remember the timing of exiting a loan may not be of your choosing
Loss of flexibility
Generally there is limited scope to make large lump sum reductions during fixed period - eg you could be on a low rate but can't pay off the loan any faster . Also there is usually no access to redraw - what if you need those funds for a rainy day?
Also most fixed rate facilities do not offer genuine 100% offset accounts so you will not have the option to reduce your daily interest by offsetting any surplus funds against the loan.
What if you require extra funds and the bank says no. You might be forced to refinance and get a nice big penalty on the way out. A realistic proposition in the current market with lenders tightening their policies.