Thinking About Fixing your Interest Rate? Read this First

This post was originally published at unohomeloans.com.au

---

Choosing to build a new house is an important decision. However, it can also bring times of uncertainty and stress. One of the biggest stresses can be managing or selecting the right finance options. At iBuildNew our qualified consultants will provide free advice and guidance throughout your home building journey. We have chosen to work alongside uno Home Loans to ensure you can compare different financial options for your new build. Together we aim to make this process as straightforward as possible. After deciding to build a new house, it is important to secure the most competitive home loan. uno Home Loans allows you to compare the offerings of a large panel of both major and small lenders. uno Home Loans are able to provide expert advice regarding your borrowing needs. 2016 saw fixed interest rates on mortgages at a historical low. Currently, the trend amongst lenders is an upward shift in their fixed home loans. Many Australians are uncertain about whether they should fix their interest rate and what proportion should be fixed.

Should you fix your interest rate?

When considering to fix your home loan, there are two positive factors to consider:

• Fixed rates will provide a level of certainty regarding your payments. This will be helpful when planning your monthly financial commitments
• You can take advantage of lower rates if you anticipate that rates are likely to rise within your anticipated loan period.

However, it is important to keep in mind that typically, trying to beat the banks by fixing prior to a movement up in variable rates is similar to going to a casino. When you get it right, it feels great. However, the deck can often be stacked in the bank’s favour. They have better insight and control over both their variable and fixed rates. This tactic could potentially leave you paying more than you originally anticipated, in comparison to selecting a variable rate or paying to refinance early. Your primary motivation for fixing some, or all of your mortgage should be to ensure some degree of financial certainty in regards to your monthly repayments.

Prepared to fix?

Knowing if you are ready to fix your interest rate is vital. Being unprepared will leave you open to potential financial barriers in the future. The 3 key factors which should be considered when looking at fixing your loan are:

• Your sensitivity to a potential rate rise
• Your level of excess cashflow to pay your mortgage off faster
• The bank's difference between fixed and variable rates

Sensitivity to rate rises:

In previous decades we have seen mortgage rates well north of 7%. uno suggests that every individual with a home loan should think about how an increase in rates of 1%-2% would impact their lifestyle. Depending on your price sensitivity this could be a small impact, however, it could potentially create extensive issues. When lenders (and advisors like uno) look at your ability to afford a mortgage they will assume the rate of the loan they are making to you is going to be 7.5% even if it’s not. It is assumed that you will be able to afford an increase in your loan interest rate up to 7.5%. However, keep in mind that typically we become accustomed to a certain lifestyle based on a certain income, and making changes can be tough. If after looking at your finances you determine that an increase in interest rates will cause problems, fixing might be a good idea.

Cashflow:

Most people tend to know that having spare cashflow means that you can make extra repayments on your mortgage or offset account. However, many people don’t know that most fixed interest rate mortgages either:

• Have a limit on extra repayments
• Don’t offer an offset or only allow you to partially offset, reducing its effectiveness

If you have extra cashflow and you decide to lock into a fixed loan you are potentially reducing (or removing) your greatest benefit - extra repayments.

Difference between variable and fixed rates:

A story can be told when there is a difference between variable and fixed rates. For the last year fixed and variable long term loans (5+ years) have been relatively similar. However, as 2016 came to an end long term loans shifted upwards. This clearly indicates that lenders expect rates to go up in the long term. When deciding to fix your home loan, the difference between variable and fixed interest rates is the cost you will pay for piece of mind, if rates do rise again.

Why use uno to compare your interest rate?

Knowing that you are making a the right decision when it comes to financing your new home build means that you can save and focus on the exciting time of building your own home. Using uno’s platform allows you to compare a range of competitive home loan options. If you need financing to build your new home head over to unohomeloans.com.au or call a member of their service team who are available extended hours, 7 days a week.