Why fix for 10 years?
10 years is one of the longest terms available for fixed rates in Australia. So why do people choose to fix for such a long period of time?
- Peace of mind. History has shown us that financial meltdowns can happen with very little warning, often leaving those that are not prepared in precarious situations.
- Borrowing capacity. High net worth investors or those on a fixed income may be unable to make the repayments on their loans if rates increase. By fixing the rate you can often increase the amount that you can borrow as most banks consider you to be a lower risk.
- Saving money. By fixing when rates are low some people try to beat the market and lock in the "good times". Of course to do this effectively you need to have a good understanding of the financial markets and the likely future of interest rates.
Who fixes for such a long term?
Professional Investors. Investors that have purchased a property that they intend to hold for the long term often lock in a 10 year interest only fixed rate which keeps the payments at a minimum and allows them to focus their attention on new investments. Larger property portfolios can easily be wiped out in a few years if the reserve bank increases rates. Investors with net assets over $5 million tend to prefer to fix part or all of their portfolio to protect themselves from market movements.
Conservative home owners. Older home owners have seen plenty of economic meltdowns so tend to prefer fixed rate loans. When a crisis hits it is usually too late to fix and so many are forced to ride out the storm. By fixing when the economy is running smoothly you can prevent future hardship.
Which bank has the lowest 10 year rates?
Finding the cheapest fixed rate isn't as simple as a quick google search. Most banks set their fixed mortgage rates on a weekly or fortnightly basis so the answer to this question is always changing. We usually compare the lenders that are most competitive for fixed rates and obtain a pre-approval with the lender that is cheapest. At the time of going for formal approval we re-assess the fixed rate to ensure that our customer still has the most competitive loan.
Can I have features such as redraw and extra repayments?
Unfortunately most fixed rate loans have restrictions on making extra repayments, do not have a 100% offset account and have no redraw feature. Because of this it is important to compare not just the interest rate, but also the additional features offered by the banks. Decide which features you need and then discuss them with us so we can help you choose the most appropriate lender.
How should I structure my loan?
Professional investors tend to structure their loan as a sole loan account that is fixed with interest only repayments. This is because they have little need to make extra repayments, to redraw or to pay off the loan early.
Home owners tend to require more features and flexibility. Many choose to split their loan to be part fixed and part variable so that they can make extra repayments and redraw on the variable portion. The fixed rate portion of the loan is usually between 50% and 90% of the loan amount, depending on how much our customer believes they can repay during the first 10 years of the loan.
Avoiding the potential problems
Not every person should fix their rate. A fixed rate is only suitable if your personal situation is unlikely to change in the future. A 10 year fixed rate will be unsuitable if you:
- Are planning to make large lump sum repayments.
- Plan on selling the property in the first 10 years.
- Require a flexible loan with features such as an offset account or a redraw facility.
How do I apply for a fixed rate loan?
Contact us or enquire online and one of our mortgage brokers will contact you to discuss your options.
