Is the move to fixed interest rates in this environment a wise one?

​Of public interest these days is the choice to fix or choose variable on your home loan. 

You may have heard of bankers and brokers spouting the concept of 'the house always wins', meaning I guess that, the banks have better modelling, enabling them to know how to price fixed rates so that they always come out on top! Rumours aside, the best thing is to inform yourselves as to what the benefits are and what the drawbacks are.

As mortgage brokers we don't advise on locking in rates or remaining on variable, but buyers should definitely consider the pros and cons. As mortgage brokers we CAN however provide you with options and a lot to think about....
 

The Pros:
Great for those on a budget seeking security, who cannot afford a hike in rates.
Stability in your budget, assuredness that your rate won’t increase (or decrease)

The Cons:

• A fixed rate can attract an early repayment penalty if you break out of it early via early repayment, sale, refinance. This fee is unascertainable until the rate is broken, as it will be based on wholesale market rates at that time. That's a very big IF! When the Rudd government legislated out "early repayment penalties" many people were mistakenly led to believe that fixed rate penalties would be waived also. Not true! So borrowers should exercise extreme caution and be committed to seeing the term of the fixed rate out. Different Lenders offer between 1and 15 year fixed rate terms.
• Most lenders do not have 100% offset accounts for fixed rate loans, so consider keeping some of your home loan on variable by splitting it, so that you can still use an offset account and park any savings somewhere.
• If the cash rate drops, you cannot simply switch out to a variable rate. The more the cash rate drops the higher your early repayment penalty could be.

 
The reserve bank has repeatedly announced more stability in the cash rate. The Sydney Futures Exchange long term yield curve currently pegs the market expectation to be one to two rate rises next year of 25bps.
 
What should we do!??!
 
A popular option we often find our first home buyers love is what we call a cocktail loan! Why not mix it all together a little if you want the best of both worlds...?

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A lot of our clients split the loan half into fixed and half variable. This helps the client hedge their bets and allows them to still use a 100% offset account linked to the variable portion of the loan, and they can make unlimited extra repayments to that part without penalty. The client gets the best of both worlds and can mix the loan up into any portion they want.
 
Also, you can look at asking your broker if the banks are negotiating on any fixed rates. Some lenders are currently in a little price war on the 2 year fixed rate, so the carded rate in the branch may not be the best you can get, always ask your broker!

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Lastly, I would stress that if you do wish to fix, consider paying the $395 annual fee for the 'package' that nearly every lender has. What this does, is with most lenders, gets you a further 0.15% off the fixed rate. This doesn't sound like much, but if your loan is just $263,000 the discount will cover the package fee each year, any loan size higher than that is pure savings. As an added bonus, you will get all the benefits of the package which are quite often, lowered app fees on various bank products, free renegotiations on your home loan (saving you on switch fees), valuations, offset accounts and transaction accounts without fees, annual fees waived on credit cards, and other soft benefits ! A broker can weigh all of this up for your accurately to help make an informed decision.