Is it time to fix rates?

There is an increasing level of noise in the media about whether or not interest rates are about to go up. Such debate can certainly cause an unnecessary level of anxiety amongst home owners who have an existing mortgage.

The first thought many home owners have is whether they should fix their current home loan interest rate. There are a number of important issues to be aware of if you are thinking of going down this path. These are:

  1. Usually fixed rates are about .5% above existing variable rates. At this point in time the average fixed rate is up to 2% higher than the variable rate. This has an immediate impact on your hip pocket.
  2. Fixed rate loans usually have higher on going fees than comparable variable rate loans.
  3. The major issue with fixed rate loans is the break cost fees. These are a fee you pay if you decide to leave a fixed rate contract before the end date. For example, you take out a 5 year fixed rate and after 3 years interest rates go down again, you decide to switch back to a variable rate. The break cost could well be many thousands of dollars depending on the loan amount and the number of years left in the fixed rate contract. Most people aren’t aware of these fees and can be a major shock when you find out how much it can cost to break a fixed rate loan.

In summary, fixed rate loans can be an excellent way to protect yourself against rising interest rates but there can be a downside to them.

In the current climate where most economists do not agree on what is going to happen to the economy in the future it is very important that any decision to fix rates should be discussed with your finance broker so that an informed decision can be made. As the old saying goes…”act in haste repent in leisure.”

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