When to float and when to fix
It’s always a question that homeowners want the answer to. The best way to answer it is to weigh up your priorities and choose the rate and the term that’s best for you. Here are some things you may want to think about.
Benefits of a fixed rate mortgage
A fixed rate means you’ll know exactly what your repayments will be over a fixed term. So whatever interest rates do, you’ll be able to budget for your repayments with certainty. You can even increase the amount you repay by up to $1,000 a month or $500 each fortnight without any penalties (as long as those increased payments remain for the fixed rate period.)
Benefits of a floating rate mortgage
A floating rate never runs a risk of having to pay a break fee, and moves up or down with the market. They’re also more flexible if you want to make extra repayments on your loan at any time. If you are salary crediting and transactional banking, at least a portion of your loan must remain on floating rate. The downside of a floating rate is that rates can change at any time – and that means your regular repayments will change too.
Most will want a combination of floating for flexibility and fixed for security of repayments. Good advice around structure is important.
What can you afford?
When planning your budget, it’s a good idea to think about the impact of rate increases. If your regular repayments go up, what will this mean for your other financial commitments and lifestyle costs such as holidays and entertainment.
What’s the cost of certainty?
While it will cost a little more to fix your loan now, over time the price difference between a fixed and floating rate is likely to be small. That’s the price of knowing exactly what your regular repayments will be.
What are your plans?
Your personal plans also impact your interest rate decision. If it’s likely you’ll be making a lump sum payment on your loan in the near future, you may be better to keep a floating rate or only fix for a short term.
Is it a good idea to split?
By splitting your loan between a fixed and a floating rate, you can strike a balance between certainty and flexibility. How you split the loans depends on which of the above is more important to you.