Fix or float – or both?
To fix or to float your mortgage is a hot question right now as interest rates continue to rise and homeowners consider a decision that could save or cost them thousands of dollars.
Higher interest rates are here to stay as the Reserve Bank continues increasing the Official Cash Rate to ease inflationary pressure, so the most useful thing current or potential homeowners can do is take a close look at how they have or will structure their mortgage.
Understanding the difference between fixed and floating or variable mortgages can help homeowners mix and match them to suit their circumstances and conceivably save thousands of dollars in the process.
So what is a fixed mortgage?
A fixed mortgage is exactly as described. It fixes the interest rate on your mortgage for a specific period, generally ranging anywhere between six months to five years.
Fixing your mortgage for a set period gives homeowners certainty around the repayments required on their mortgage each month, and the security that this won’t change for the term of the fixed rate.
At the end of that term however the mortgage rolls off the fixed rate and the mortgage holder will need to decide what new length and interest rate to choose.
As a rule, the shorter the fixing term, the lower the interest rate offered. In recent times when interest rates were extremely low most homeowners were choosing short term fixed rates of six months to one year. With interest rates on the rise however there is a trend of fixing for longer periods of time. Those homeowners who fixed in rates of around 2.99 percent for five years 12 months ago are no doubt feeling very happy with their decision now.
The alternative: floating your mortgage
The alternative to a fixed mortgage is a floating or variable mortgage.
If you choose to have a floating mortgage the interest rate on that portion of your mortgage will move up and down with the market, your repayments increasing if the interest rate rises and decreasing if interest rates reduce.
The interest rate offered on a floating mortgage will generally be slightly higher than a fixed rate but there are benefits to a floating mortgage.
You can repay the loan as fast as you wish and not face any penalty or break fees for paying off your loan faster than agreed. You can also generally switch to a fixed term at any point if you change your mind.
Different approaches to fixing and/or floating your mortgage
One useful approach can be spreading your risk by dividing your mortgage into a few different fixed term loans. Doing this means you spread the mortgage over several different interest rates and not all the loan will come up for renewal at the same time.
Doing this also allows for lump sum payments to be made onto your mortgage at the point any of the loans roll over, allowing you to pay off your total mortgage faster, saving you money in the long run.
Homeowners can also adopt a mix of the two options, fixing part of their mortgage across different loans and leaving a portion of the mortgage floating.
The floating portion can act like a form of revolving credit. You can pay down the floating portion as fast as you like, but you can also access the funds from the account should you need to.
In the current economic environment, everyone’s circumstances are different but it’s good to look at the market from a short, medium, and long-term outlook and structure your mortgage accordingly. Spreading your mortgage across several fixed terms and including a floating portion can help ensure you don’t get stung as interest rates continue to rise.
Talk to our team and they can help find the best solution for your circumstances.