All Topics / Legal & Accounting / Do you think it is time to go fixed interest rate?

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  • Profile photo of NanNan
    Participant
    @nano
    Join Date: 2015
    Post Count: 26

    As the interest rate is low at the moment, although it is expected to have another cut, do you think it is good timing to change to fixed interest rate now?

    What do you guys think?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    How much higher would you be paying on fixed rates compared to variable?
    How many rate rises would it take for you to be ahead?

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of PimobpiPimobpi
    Participant
    @pimobpi
    Join Date: 2013
    Post Count: 60

    Hi Nan,

    Understandably, everyone with a loan wants to limit their interest expenses. I would NOT choose to fix my rate unless I couldn’t afford another interest rate increase. Are you trying to “time” when to fix interest rates because you cannot afford to pay more or because you are hoping to fluke some interest savings? I am thinking that you may just be looking for clever ways to make a saving. I admire that you are thinking of ways to increase your wealth. Your entry hints that you yourself may believe there to be another interest rate cut so your gut may be telling you to ‘pause’.

    I know many who have lost a lot of money & options fixing rates (the rate decreased afterwards). Only the ones who fixed for “security” were still happy about it after the rates decreased. They fixed their rates as an insurance policy against their inability to pay out further loan expenses. They crystallized one expense payment by purchasing some peace of mind.
    * Yearly interest payment: $25,000.
    * Couldn’t possibly afford interest payments to be above $30,000 (annually – for the next 5 years).
    * Fixed the rate at a figure below $30,000.

    If you are thinking to fix your rate to insure against your inability of paying higher interest expenses, then please look at your overall expenses before you fix the rate. You may find substantial savings in other areas before taking this crucial step.

    Cheers, more health & wealth to you.

    • This reply was modified 3 years, 7 months ago by Profile photo of Pimobpi Pimobpi.
    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,376

    Hi Nan,

    When Kevin Rudd was PM, I had heard of people “fixing” at 9% after rates had screamed up (erroneously while the rest of the world were madly CUTTING their rates – this was the GFC timeframe). Many of them regretted the move as Interest rates then fell to their LOWEST rates since the 60’s in less than a year from when they hit 9%. Some had fixed for FIVE YEARS and were “overpaying” until 2013.

    Right now though, I can understand someone considering “Fixing” their loans. The rates are WAY lower today, and, though they might drop more, there are very few who CAN’T pay their mortgages at these rates. If it gives you peace of mind that they won’t go up again during the Fixed Rate period, why NOT lock them in??

    Well, that latter is a very good question. Here are a few thoughts re “Why not fixed?”

    1. Once you fix them, if your situation changes, you might be in a world of pain if you need to “unfix” them.
    2. If you plan to sell a house at all in (say) the next five years, be very wary of “fixing” its rates for the full five years as you may need to sell sooner than you expected.
    3. There might be a need (suddenly) to re-appraise ALL of your portfolio, and even re-finance some/all.
    4. Apart from cost, once the rates are fixed the other thing lost is flexibility.

    The problem comes when you need to BREAK a fixed loan term (e.g. you set the term at 5 years, but after 2 years you find you must “break the fixed term contract”). The cost to break can be HORRENDOUS !!

    Note that a Bank will allow you to change a Variable Loan to Fixed at minimal cost – but, try to go from Fixed to Variable? “Now, just wait a minute while we tot up the bill!”

    You might need another mortgage to PAY the Break Cost.

    Nan, I would suggest you consider fixing ONLY if you are very secure in your employment (or continuation of the Income that you receive now, wherever it is from), AND confident that you will have no need to sell or refinance this loan for the total contracted period.

    If you have any doubts at all, don’t !! And, of course, DO talk with your finance person in depth BEFORE doing it. I’m sure I have only scratched the surface, and there is much more to learn/consider re these.

    Benny

    Profile photo of NanNan
    Participant
    @nano
    Join Date: 2015
    Post Count: 26

    Thank you Pimobpo and Benny. You mentioned a lot of areas I did not consider before. This post will help others who have the same question. Thank you as always.

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